Video Q4 Market outlook webinar - Tricks or treats – Investing during policy change

00:00 

 

Good morning, everyone. Thanks for joining us today. I'm Anthony McDonald, Head of Portfolio Management at Aegon UK, and I'm also joined by Dan Matthews, who's a Senior Investment Manager in my team. Over the next 30, 40 minutes, we're going to talk a little bit about some important changes to the market backdrop and what they might mean.  

 

We've got a slight Halloween theme here as well, tricks or treats but the key is about potential policy change and the implications. That's captured on the learning objectives that I've just put on the screen. In keeping with the loose Halloween theme, I'm going start off by showing five spooky charts and the five things that we think are highly relevant to any investment conversation right now. 

 

 

 

00:59 

 

Dan is then going to pick up, in a little bit more detail on the elements of the changing environment. And as always, we will leave plenty of time at the end for questions.  

 

There's a lot going on right now, so please do use that Q and A button on your Teams screen to ask any questions you might have and we'll make sure we get to them at the end of the presentation. Also, towards the end, we'll share the CPD certificate link in the comments section, so please do also look out for that. 

 

01:33 

 

As always, I like to start with a quick reminder of our investment philosophy, not least because you should expect that to affect the prism through which we analyse markets and present them to you. We do take a long-term approach to investing your client's money.  

 

We're anchored by valuation analysis, and we think that the valuation – the price at which we buy assets is a key determinant of their longer-term opportunity. We think those two things, long-term and valuation are our edges in navigating the funds through different environments. Sometimes it needs a bit of patience but over the long-term, but we think that with the right approach and the right mentality, we can add value. 

 

02:25 

 

As I said, I'm starting off with five spooky charts. Given that emphasis on value I just spoke about, it's probably no surprise that my first spooky chart shows quite how expensive US equities are compared to their own history.  

 

The chart here shows the cyclically-adjusted price earnings ratio (CAPE), it shows the price of the US index divided by the 10-year earnings average. What that tries to do is smooth out cyclical ebbs and flows in the economy and in the earnings cycle in particular, to give a more meaningful measure.  

 

 

 

03:17 

 

What we find in keeping with quite a lot of other valuation measures, is it tends to correlate reasonably well with future long-term returns. When it's up high, it's a high valuation that's typically associated with below average future returns. And when it's low, the other way around, above average future returns. 

 

What we can see here, is data going all the way back to 1900, and it's only been at the current level twice before – the dot-com bubble in 2000 and the post Covid bubble, or the speculative furor with stacks blank check companies, et cetera in 2021. And look at it now, it's rapidly approaching those levels again.  

 

 

 

04:08 

 

Two things there. The first is, as I said before, it's associated with below average future returns but also that they may be more vulnerable to a change in environment.  

 

US equities have been an excellent investment for a long period of time and that's why the valuations have picked up so significantly. They're now last part of most equity benchmarks and portfolios, at a time when they're looking quite expensive and suggesting that we should be increasingly worried about the risk of a change in their performance prospects.  

 

That's one reason why we're thinking really carefully about the changes to the investment backdrop and whether they're likely to continue rewarding the same investments as before. 

 

04:58 

 

The second spooky chart – a very similar theme but it's one which has tended to receive less attention than the US equities. It's Investment Grade Corporate Bonds. Again, a measure of valuation. And what you see here on this chart, back to the turn the century, is the US investment grade credit spread.  

 

That's the yield premium – the additional yield an investor gets for taking on the credit risk for lending to a company, a corporate bond effectively, rather than the government. So, it's a difference between the yield on the investment grade credit index and the yield on a similar government bond index. 

 

05:52 

 

What you see here, is it’s just dropped to levels that we haven't seen since 2005. So, before the great financial crisis, and actually a time at which liquidity was much more structurally abundant in credit markets. Investment banks were much more willing and able to use their balance sheets to support the market liquidity. We can understand to some degree why the spreads have come down so much.  

 

We’ve seen a surge in demand for corporate bonds due to the higher yields on offer in this higher rate environment. As interest rates and government bond yields have gone up, corporate bond yields have gone up too, and that’s attractive to a lot of market participants.  

 

06:45 

 

But at this stage, we're at levels where we think it's important to be careful about the level of credit risk in portfolios, there spreads are tight and there's not much margin for error. As you can see, they do periodically widen at times of greater stress and certainly while they can stay low for a while, there always comes a time where it feels, to use a bit of a hackneyed adage, a bit like picking up pennies in front of a steamroller. Where the small additional yield that you get for a while can be completely swamped if and when you get one of these regular periods of spread widening.  

 

So, like I said, an area that's had a little bit less attention than the valuation of US equities, but another one that is worth being very mindful of and thinking about how that’s evolved over the last six to 12 months in particular. 

 

07:44 

 

The third spooky charts is China's economic downturn. To be honest, I could have picked any number of charts to illustrate here the now relatively prolonged, or at least persistent growth slowdown, at a time of pretty acute stress in the property market, and related to that, actually subdued consumer spending.  

 

It's been a really challenging period for China's economy, and what you see in that purple line, is China's consumer confidence, just look at it! You can see it fell off a cliff during Covid, understandably, in keeping with the rest of the world but what I find really remarkable is it has flatlined ever since. If anything, it's just dipped back down towards the lows again.  

 

 

 

08:35 

 

So, unlike practically anywhere else in the world, where we've seen, as you'd expect a recovery from the nadir of sentiment during Covid, there just has not been any pickup in sentiment amongst China consumers since then. For me, that illustrates the depth of the malaise in the country, and surely something meaningful, some kind of spark for change is needed for any improvement. 

 

 

 

09:06 

 

What you see below that, is just that year-on-year change of value of China's retail sales. The point there is you can see pre-Covid, that was gradually trending down a little bit as growth rates were, but at or close to healthy double-digit year-on-year levels. More recently, you can see it's kind of stabilised at much lower rates, indicating quite how much of an impact that lower consumer sentiment is having on direct consumer economic activity, such as retail sales. An economy that has been under stress for some time and the extent of it shouldn't be underestimated, and the lack of improvement shouldn't be underestimated. 

 

10:01 

 

Much closer to home, thinking about that black hole we've been told about in the public finances, that the Budget, amongst other things will be seeking to address. I think we're all aware by now of the estimate of just over 20 billion shortfalls for this year's spending, compared to previous plans and possibly actually closer to double that given some of the political decisions taken since the election.  

 

 

 

10:37 

 

But on top of that, the spending plans for future years were very tight as well, possibly unrealistic. When we put together the projected overspend for this year and the likely need to be more realistic about spending in future years, that's why we're preparing for higher taxes and spending cuts to address the problem of the budget deficit, which you can see from the green line there, has just kind of pushed out a bit towards 6% of GDP again.  

 

 

 

11:12 

 

What you see in the purple line is the forecasts from Oxford Economics (excellent economic forecasting house), showing that with the measures that I expect to be put in place over the next couple of years, that budget deficit should close quite possibly towards 2% of GDP. That's likely to be a more sustainable level, so a source of good news but the path to get there is one of fiscal consolidation – tax rises, some spending cuts, and that would normally come with a more difficult economic backdrop. So, again a slightly tricky environment here in the UK when it comes to the public finances. 

 

12:05 

 

Finally, on the spooky charts. I think it's important to remember, because it was over and done with very quickly, that air pocket in markets that we saw in early August. Where we saw those significant falls led by Japan but with other markets falling quite substantially as well, over just three market days.  

 

A brief but important period of turmoil, and both at the time and with the benefit of hindsight, it does look and did look to be a very large reaction, probably overreaction, to a small interest rate hike in Japan and some moderately, I’d emphasize moderately, weaker US economic data. Such that VIX fear index reached levels we've only seen twice before in 20 years – the global financial crisis and Covid, so it really didn't feel like the underlying dynamics – economic and broader dynamics we're in keeping or comparable to those events. And yet, we saw this sharp and sudden, bout of stress in markets.  

 

 

 

13:22 

 

I think it's really relevant that it came after those pretty modest reminders, particularly US data, that there might still be risks to what was and has since become an increasingly consensual expectation for the economic soft landing, the jargon for the fact that, without trying to give central banks too much credit, but central banks or economies genuinely might be able to conquer that inflation surge we saw in part through the higher interest rates without the policy response itself engendering some form of meaningful or deep recession, and that may very well prove to be case. 

 

 

 

14:01 

 

It certainly does look more likely than it did a year ago. But, that sudden and sharp market response to reasonably small changes in the underlying inputs, suggest to us that not only valuations, which we saw before, but also positioning may be one-sided. May be positioned towards the things that have been performing well in the environment we've been in for the last few years and that they may therefore be vulnerable to any material change in the investment environment.  

 

And with that, it seems a good time to pass over to Dan who's going to talk a little bit more about that backdrop itself. 

 

14:50 

 

Thank you. Following on from our scary charts, we're going to look a little bit around the background to those charts and what we think might be changing here. We're going to focus on four different areas, unsurprisingly all linked to what we saw before. The first one being interest rates which obviously have started to fall, the second being the US election, which is one of the big events of the coming weeks. The China policy pivot we've seen, and then finally I'm going to attempt to not to shoot myself in the foot by talking about the UK Budget one day before they do the UK Budget.  

 

 

 

15:29 

 

Before we start, I just want to draw your attention to the quote on the left and its relationship to these four things. The one truth in markets and investing is that nothing ever stays the same for very long, and in fact just when you think things are stable or you've got it figured out, something comes along and shakes everything up, Covid is a good example.  

 

 

 

15:49 

 

But there’s a big difference between volatility and directionless change, and what I might refer to as a change point. A change point is when something shifts meaningfully, so that change is either permanent or it's likely to be at the very least prolonged. And we believe that the four things on this slide have the potential to be change points. Not all of them will be, but by their very nature, the things we're talking about here are currently unknown. But things like a changing government in the US is a change that ought to persist for around four years, absent some sort of external force changing things. 

 

16:32 

 

We all know that interest rates have been rising, and we see it on the chart there. We’ve just had a prolonged period of inflation and in response, central banks, not only the US and UK but globally, have been raising interest rates with the aim of reducing aggregate demand and removing that inflation from the system.  

 

We also know that central banks believe that this mechanism is working and that rates are restrictive. How do we know this? If you look at the chart, the blue line here is the US interest rates, and the green line is the longer run projection for that interest rate. In the US, the Federal Reserve set the interest rate and when they do so, they produce a package of data which includes amongst other things, this green line – their view on the longer-term expected rate. And simply speaking, if the blue line is above the green line, you can say that the Federal Reserve believes that interest rates are above their long-term projection, and therefore the Federal Reserve believes that interest rates are likely to be restricted in that scenario. 

 

17:34 

 

It's fair to say that we largely agree with the Federal Reserve. We've seen inflation in the system, we've seen some softening in the labor market, and we believe that these things suggest that interest rates are somewhat restrictive in the US and indeed the same at home. And therefore, should they continue to stay at this level, it's likely that you might see some further weakening in the data.  

 

 

 

17:54 

 

What we've also seen, and this is the first of our four changes, is that the Federal Reserve has made the first interest rate cut. 50 basis point cut you can see on the right-hand side of the chart. We've had a cut in the UK as well. And this sparks the beginning of what most market participants anticipate to be a new cutting cycle.  

 

This isn't without risks, there’s a potential that this could reignite growth in a way that reignites inflation, but at the moment the market consensus is that we will continue to cut from here, and that the monetary policy cycle has shifted, and we have a change point. 

 

 

 

18:31 

 

The next change is perhaps the biggest talking point of the year, and that’s the US election. We have a chart of the national polling average and what this shows is its very much neck and neck.  

 

Most of the pollsters have the race as being slightly one side of 50% for either candidate, depending on the sort of nature of the poll. But the short version is, everything is still to play for. This chart represents the potential for a significant change, but also a very significant unknown, a significant risk. One thing to highlight here is that 50:50 doesn't always mean a close race.  

 

 

 

19:18 

 

Let's say you have a thousand voters, each of them, when they're asked by a pollster, if they are 50:50 on who they’re going to vote for. On polling day if 51% favor Trump, then Trump wins in a landslide. So, in this scenario, the 50% polling probability was accurate. However, absolutely everyone has voted for Trump. And so, it's distinctly possible that on Wednesday morning when we wake up after the election, one of the candidates has won a very decisive victory despite the polls currently being so close.  

 

The election of course, represents the potential for a huge change point in the US. Clearly, the bigger change you would expect comes with a Trump win, as the policy agenda is likely to shift most materially. But even with Harris in the White House, you're likely to see some changes. She doesn't have the same policy agenda as Biden, but you may also see fallout from simply the Republicans having lost. We all remember the events of the last election. So, whatever happens we're likely to see a moment of some change in the US.  

 

 

 

20:20 

 

For us, the US election represents about as near to a pure risk as can be. All the data suggests that making a prediction here would be reckless and therefore positioning the portfolios for a given outcome would be highly inappropriate. What we do, is look at the risks to our portfolios on both sides, and we think about our positioning in that context. We don't say we don't know and ignore the risk, but you won't see us actively take on extra risk on what we perceive to be a 50:50 gamble.  

 

Also, given this is potentially a four-year change, there will be plenty of time after the election to take advantages of who has won and the shift in the policy agenda.  

 

 

 

21:07 

 

The other chart that Anthony showed us was China, and this has been amid that property led slowdown, as well as that sort of prolonged period of consumer malaise. Over the year there's been various packages of support announced but these have all been seen as fairly small in stature and haven’t meaningfully moved the dial on China's economy.  

 

Then more recently, we saw a much more meaningful package of stimulus announced. A lot of the western press described it as being a bazooka. This included reforms aimed at supporting the property market, but also the stock market directly. We also saw China continue to cut their rates in support of their economy.  

 

 

 

21:49 

 

Unlike western economies, China doesn't have one common interest rate, there's more than one rate. They will set different rates for different components and different time horizons. And the line here in pink is one of those rates. It's the Medium-Term Lending Facility, and that's just had the largest cut in its history.  

 

This has the potential to be the start of fairly significant change and indeed there's a chart later on that will show this, but the market's rallied very strongly on the back of the news of this potential stimulus. The exact details of this stimulus are still slightly unclear and so the extent this represents of ongoing and meaningful change will emerge over the coming months. But what is clear is the intent of the Chinese authorities to try and create change and change that downward path that China has been on.  

 

 

 

22:40 

 

We come to the slide where I'm most at risk of making a fool of myself, the slide on the UK Budget. We've seen all over the press the last few months, the headlines suggesting that any and all taxes could be rising at any minute, while simultaneously arguing about how we define a working person and whether that working persons taxes will go up or not.  

 

What we do know for sure, is that Rachel Reeves intends to raise taxes to fill what they refer to as the black hole in the current spending plans. We also know those tax rises are likely to be relatively significant. The current speculation is that we'll likely see a rise in employers’ national insurance as well as possible changes that focus mainly on taxes that relate to savings and investments. So, things like inheritance tax, capital gains, the way pension contributions are taxed, etc. 

 

23:35 

 

If we step back from the details, because we don't know those yet, they're pure speculation. What we can say is that we expect taxes to rise, and if you look at our beautifully illustrated diagram here on the left, you can see on the seesaw those tax rises pressing down on growth as taxes represent a withdrawal from the economy.  

 

But what we're also likely to see, and this is illustrated on the right-hand side of our seesaw, is some announced changes to the way investment spending and central bank bond sales are treated with regards to the fiscal rules. The fiscal rules are a set of rules, essentially which the Government lives by, in which the Office of Budget Responsibility examines when they do a budget, to determine how sustainable the overall debt of the UK is. 

 

24:21 

 

In short, they basically define how much borrowing is too much borrowing. One of the issues with these rules is that they're relatively short-term in nature, so they tend to treat investment spending poorly because they punish the spending component in the short-term because that raises your debt. They don't take into account the potential gains over the longer-term. And one of the things that Labour wants to do is change these rules. That opens the possibility for them to engage in infrastructure style spending on the basis that infrastructure has a positive expected return and therefore it shouldn't be considered excess borrowing, even though debt does need to increase to be able to fund it. 

 

25:02 

 

If we look back to our seesaw, in the middle there we see interest rates. Depending on which side of the economy is pushed on – do we spend money into the system, or do we tax money out of it? This will change what the Central Bank or the Bank of England must do to keep the economy imbalance. 

 

Spending will likely lead to higher growth and probably concerns about inflation coming back, whereas more cuts has the opposite impact and will likely lead to lower interest rates because people might expect a consumption driven slow down.  

 

 

 

 

 

25:31 

 

The Budget therefore represents the first major economic change since Labour won their landslide.  

 

As a team, we've been quite constructive on the UK. We think consumers have begun to enjoy wage increases in excess of inflation, and we anticipate that will show up in consumer spending, but we're going to have to wait until tomorrow to make a judgment on where our seesaw finally rests. But one thing that we do know is the seesaw is definitely going to move significantly. 

 

26:03 

 

Amidst all these changes, how have the markets responded?  

 

We've two charts here. The first one on the left shows the 18 months up until the 30th of June this year. And on the right, we're looking at Q3 this year. These are relative charts, so they show how much a market has outperformed or underperformed versus global equities. A negative here doesn't mean that the market has gone down, it just means that it has not kept up with the global markets. 

 

I imagine that most of us, when asked would say the last 18 months has been pretty strong for equities, but that left hand chart really brings home how much of that has been dominated by the US and the continued stretch of the valuations within that market – the other chart that Anthony showed right back at the beginning. The US is the only market on the charts that outperformed over that 18-month period.  

 

 

 

26:58 

 

If we then turn to Q3, we can see something of a rotation and perhaps the beginning of a broadening out within equities. Clearly the standout bar there is China. I mentioned earlier we'll be showing this, this is the overwhelming response to that proposed stimulus that we saw. So, this is the change flowing through into the market there.  

 

One of the questions that we get asked most often, is about our US underweight within the portfolios. As many people know, this is based in part on that excessive valuation, versus its own history that we saw at the beginning. But what many people often infer from our US underweight is that we must have a bearish view on global equities because they've become conditioned by that chart on the left to believe that the US market is the global market.  

 

 

 

27:43 

 

While many of the changes that we've discussed are kind of ongoing, the dominant market narrative remains one of soft lending. And changes that we're seeing at the beginning of that interest rate cutting cycle are likely to support that narrative for the time being.  

 

In a soft narrative, it's likely supportive of US equities, but there is nothing at all about the soft landing that suggests that the US equities need to lead equity returns in in that scenario. In fact, it's likely that as confidence returns to equities as an asset class, we get more of what we've seen on the right.  

 

 

 

28:18 

 

People want to buy equities and then they buy the cheaper markets, and those markets see inflows whilst being a bit cautious on the markets that are particularly expensive, such as the US and we see a bit more of a rebalancing as people become more positive. I wouldn't assume that our US underweight indicates that we aren't positive on the overall economy, simply that we think there is relative value within these markets, and this is a relative value position.  

 

28:48 

 

Let's wrap up what we've looked at. We recognise that we're in a period of significant change. We also recognise that there is a distinct lack of clarity across a lot of that change. Some of that will become clear in the coming weeks and months. Other parts probably will remain speculative for quite some time to come.  

 

What we do know is that one of the most popular trades in the market, namely that US position is particularly expensive. I often think of excess valuation as being like a tightly coiled spring. There's a lot of potential energy contained in the spring when valuations are very tight. When that force is unleashed, you can get a significant move. We saw that in China in the previous slide. China was decidedly cheap, so there was a lot of energy within that spring and then the stimulus was announced, and we had significant move during that time. 

 

29:41 

 

What we don't know is, is what event will cause that spring to bounce back or when that event will happen, but we do know that things are more likely to happen during periods of change, than during periods of status quo.  

 

A lot of what we've covered today appears to be about the unknown, but we're quite excited about the opportunities that we think these changes will afford us over the coming 12 months. Any change always creates dislocations, and dislocations are exactly what an active asset allocation strategy is there to take advantage of. 

 

30:22 

 

Just to bring it home, these are our current asset allocation views. The fund remains neutral on equities with a preference for bonds over cash, and then within bonds we continue to prefer Guilts. We prefer UK government debt to overseas government debt, and in fact we prefer UK corporate debt to overseas corporate debt as well. Within equities, we continue to hold that underweight US position due to those excessive valuations. And we have overweight’s in the UK, Japan, and emerging markets.  

 

We are happy as always to take any questions you might have. Thank you. 

 

31:07 

 

Thanks Dan. Please do use that Q and A button to ask any questions you have about what you've just heard or on markets generally.  

 

The first question. Regarding the narrowing of US credit spreads on slide seven. Is that only an issue in the US or is it a wider problem across the globe? 

 

The answer is that it's a relatively global phenomenon. We've seen tightening spreads certainly in investment grade markets globally as people are chasing increasingly higher yields. If you look at the previous slides where we were looking at our convictions, we have a preference for UK over US, and there is slightly more value there. When we're neutral on the UK, it's not an overweight position because we have seen that tightening of credit spreads, in both of the credit markets that the fund can invest in. 

 

32:28 

 

Next question. I've had a few conversations about the conflicts in Middle East and its impact on the markets. what are your thoughts?  

 

Good question. It undoubtedly has the potential, if escalations to have a substantial impact on markets, so for a few of these update calls, we did talk about it. But it's one of those things where it's kind of been rumbling along for so long that there's only so much we felt we could keep adding, which is why we didn't specifically talk about it. But I'm glad you've given us the opportunity to pick up on it. 

 

33:15 

 

There are elements of similarity with the war in the Ukraine where we are massively conscious that there are huge humanitarian problems, losses of life and long-term challenges being created.  

 

It’s difficult to say that we stopped talking about it just because it's been going on for so long, but unfortunately that's kind of the way the market tends to address any event really. It assimilates it and there needs to be further change in the news flow for a further market reaction.  

 

I suppose on that point, the one interesting thing we have been discussing as a team is, if we look back at what people – commentators, geo-politicists said would've been the red lines when Israel first went into Gaza, elements like a war and attacks with Hezbollah and Lebanon, direct engagement between Israel and Iran. We do find it interesting that those have happened and there hasn't been any substantial market, and I say very careful, geopolitical tipping point reached.  

 

34:54 

 

With that in mind, we are acutely aware that we seem to be close to crystallizing some risks that are not yet crystallized. But we don't think that there is an inevitable path to a broader configuration.  

 

And so, we think about risks and opportunities around that and the most salient, but to some degree, challenging asset classes such as government bonds, where typically in periods of broader geopolitical stress, they get a bid as the flight to safety. Clearly, it's a little bit more complicated in the Middle East because of the interaction with inflation and the oil price, but at this stage we do think that having a little bit of government bonds duration in the portfolios is likely to be protective against a worst-case outcome. 

 

36:04 

 

To Dan's point, it’s one of those known unknowns, where we can all see where the risk could go but we can all see that it may not get there and it's kind of relevant and interesting, that the broader geopolitical configuration has been contained, even as some steps have been taken towards what would've initially been seen as problematic. Dan, anything you'd add to that? 

 

36:35 

 

One thing I would say is that if you look at the allies to the US being Israel, that is not a strong economic relationship. It’s a strong historical relationship, but there's not a big import / export relationship there, and so, there's not a huge disruption to western markets from what's been going on.  

 

Whilst there are conflicts across the wider Middle East, most of the places where that conflict is occurring are not allied with the large developed markets, which typically equity investors are investing when they're sitting in a portfolio such as ours.  

 

Whilst there are significant things going on, the actual impact on people's portfolios is relatively muted because people are not holding Iranian equities and Lebanese equities, and they're holding large developed markets that are largely sort of unimpacted by the conflict. 

 

37:33 

 

The only final thing I would add, there is inevitably a bit of a vacuum in the US leadership, not an abrogation, but just a power vacuum because the existing president is a bit of a lame duck. There are two potential replacements that are busy campaigning in a very tight election, and an election where there are geopolitical as well as economic ramifications.  

 

The fact that some of the conflicts seem to have ratcheted up, may suggest we’re moving towards a peak as we get past that point of political change in the US. 

 

38:22 

 

Next question. Whilst it's dangerous to second guess any budget, what's Aegon’s thoughts on how the UK markets will react to any significant tax attack on pension and ISA savings?  

 

This is one of the elements, when we think about markets and dealing with uncertainty, which are we have a reasonable view what the outcome of something, in this case what will be done in the budget is knowable, and then we have to have a reasonable view of what implication that will have on markets.  

 

This applies equally to the US selection and at this stage I think both are very challenging. 

 

It's starting to take some shape, but exactly what will be done in the Budget, exactly who will win the US election, is very difficult to have a strong opinion on. Even if we did have an opinion, they are two events that are particularly hard to say with confidence – if X happens, then markets will do Y and so I'd be careful to talk about how we think markets will react.  

 

 

 

39:45 

 

The way we think about these things is what are the particular parts of markets that look to be at greater risk?  

 

How do we capture those risks in our view, the probability of those events happening and what does that mean for how we construct a suitably diversified portfolio that is emphasising opportunity, particularly valuation opportunities in a prudent manner. 

 

 

 

40:13 

 

If we take emerging market equities as a risk, and it's slightly away from the question, but the principle is the same around the US election.  

 

We do think emerging market equities look a bit cheaper than global equities. Dan's gone through the reasons why to be a little bit positive in most market equities and we do have an overweight conviction, but we’ve taken a little bit off the table just because we think emerging market equities may be vulnerable, at least in the outset to any Donald Trump election, given geopolitical risks around tariffs et cetera and we’re not convinced that kind of risk is symmetric if Donald Trump isn’t elected.  

 

There are times where we can have very high conviction on an outcome of an event, and / or the way that outcome would feed through to markets but there are times when it’s harder. 

 

41:10 

 

On the UK budget, to get to the gist of the question, because of the seesaw diagram Dan set out, I think it’s quite tricky.   

 

On the one side we are going to be thinking about, on the current basis Budget, some degree of fiscal consolidation. I talked about that earlier on, and probably that continuing for some years. But on the other side, some degree of changing the rules of the game, which is always a little bit challenging for market participants to confront, such that there can be more longer-term spending which will link to government borrowing to some degree.  

 

 

 

41:50 

 

There are a lot of moving elements – short term, long-term, tax versus spending, which means knowing exactly the impact is difficult. That also means there will probably be some volatility as people try to work through exactly what its likely to mean over time.  

 

What we're focusing on is where the risks are and where we think the risks are better reflected already and what that means for opportunities coming out of it.  

 

Dan, you talked us through the seesaw slide, is there anything you you'd want to add? 

 

42:23 

 

I just think it depends where they spend it, would be my answer.  

 

The reality is people probably have a very realistic response to changes in taxes on their savings. People don't suddenly go out and start spending their savings because the tax rate has changed marginally on them. They may save slightly more. I suspect a very significant number of people couldn't work out the tax bill on their current pension contributions and so, won't be quite so hyper aware of the impacts of changes.  

 

You'd assume that some people save a bit more and therefore don't consume that money. The question then is what does the government do with the money they’ve collected?  

 

If they choose to spend into house building for example, with lots of UK listed house builders, there's a reasonable chance that you get quite a lot of stimulus in the UK market. It's very much both sides of the seesaw and dependent on what do they do with the tax that they take, as much as how much they take from us. 

 

43:29 

 

Thank you, and with that I think we've got through the questions so it's a good time for us to stop. Thank you very much for joining us. We always appreciate your time, and we wish you all the best until our next update.