Our weekly investing podcast

00:00:10:00 - 00:00:23:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. This week, I am delighted to be joined by Tom Hibbert from our Chief Investment Office.

00:00:23:00 - 00:00:24:00
Tom Hibbert
Bonjour.

00:00:24:00 - 00:00:52:00
Jane Parry
Bonjour. And that's because we are going to France this week and we're going to talk about France's debt problem and could Britain be next. So, with apologies for the French, as you know, each week in the podcast, we try to cut through the noise, demystify what's happening in the markets. And this week we are hopefully demystifying what's going on in the French bond market. And then you can hopefully feel more informed, confident and in control of your financial future.

00:00:52:00 - 00:00:53:00
Tom Hibbert
Let's jump into it.

00:00:53:00 - 00:01:33:00
Jane Parry
Let's jump into it. So, just as a bit of background, France has had five prime ministers in two years, a budget forced through without a vote and a gap with Germany not seen since the eurozone debt crisis. So what I want to know this week is what's gone wrong in Paris? Could the ECB, that's the European Central Bank, come to the rescue? And is there a lesson in all this for Britain? So, grab your strong French coffee, let's dive on in. So, Friday was a particularly strong day for bonds globally, but some countries were left behind. So who was left behind and why does that matter?

00:01:33:00 - 00:02:26:00
Tom Hibbert
Yeah, I sat at my desk on Friday morning and there was a, you know, a notable global bond rally. And while monitoring that, it was notable that France, Italy and Greece really didn't participate in that rally. And you know, often during bear markets, we're in the middle of this bond bear market, you have very strong days because, you know, they usually follow a particularly pernicious sell off the day before. And Friday morning was a little bit like that really. And, it was just a notable flight to safety under the bonnet of the global bond market, where the perceived riskiest sovereign bonds really didn't participate in that broader market rally. So France, Italy and Greece, Italy and Greece, I think, you know, historically have been the countries of focus. At the moment it's France. So let's talk more about that.

00:02:26:00 - 00:02:35:00
Jane Parry
OK. And we mentioned there's a gap between the French and German government bond yields. So why do you normally compare with Germany?

00:02:35:00 - 00:02:39:00
Tom Hibbert
Well, we call, French OATs is the French sovereign bond market.

00:02:39:00 - 00:02:40:00
Jane Parry
OATs?

00:02:40:00 - 00:03:40:00
Tom Hibbert
French OATs and German Bunds. So the OAT - Bund spread is often how people measure sort of euro debt sovereign risk Germany is the safest country within the Eurozone from a fiscal perspective. They've got a low debt to GDP ratio. The OAT – BUND spread on 10-year bonds has widened dramatically this year. So at the start of the year, it was at 0.7%. It's now doubled to 1.4% to the end of last week. That's the highest level since the European debt crisis in 2012 and it just reflects this growing investor concern about France's finances. A good measure as well is these credit default swaps which are insurance if you don't get your money back on a bond. France's credit default swap spreads have widened dramatically as well so now if you look at the probability of France not paying their debt back, it's risen to about 6% in the next 5 years.

00:03:40:00 - 00:03:42:00
Jane Parry
Like an insurance premium sort of thing.

00:03:42:00 - 00:03:57:00
Tom Hibbert
Yeah, exactly. It’s a non-trivial risk, I would say, it's still low in absolute terms. And, you know, you look at the European sovereign debt crisis, Greece's credit default swaps went to 2000 basis points and France's are 80 at the moment. So it could get a lot worse.

00:03:57:00 - 00:04:01:00
Jane Parry
But it's the second flag of what's going on in France.

00:04:01:00 - 00:04:10:00
Tom Hibbert
Yeah, it's just another yeah. And it's obviously a topic of conversation at the moment. And France is perceived as a risk.

00:04:10:00 - 00:04:22:00
Jane Parry
So we've talked about the comparison with Germany. What about the comparison with the UK? Because we've spent months saying the UK has the highest G7 government bond yields.

00:04:22:00 - 00:05:09:00
Tom Hibbert
And that's true, but you also have to think about inflation. And obviously inflation is good for debt because it erodes debt. Inflation in the UK and inflation expectations are a bit higher. Interest rates therefore are a bit higher. So, a good way to compare like-for-like between euro debt and sterling debt is if you hedge the euro debt, the 10-year yield on French government bonds hedged back to sterling is 6.5%. So, if you compare that with UK gilts, the 10-year yield in the UK is 5.4%. That means that the yield on 10-year French government debt sterling hedged, is 1.14% higher than that of the UK 10 year.

00:05:09:00 - 00:05:22:00
Jane Parry
So in plain English, if I'm understanding this correctly, investors currently want more compensation for French risk than for UK risk?

00:05:22:00 - 00:05:24:00
Tom Hibbert
On a currency hedged basis, yes.

00:05:24:00 - 00:05:27:00
Jane Parry
So why is France so stuck then? What's going on?

00:05:27:00 - 00:06:58:00
Tom Hibbert
Yeah. So I mean, last month France officially missed its 2026 budget deficit target of 5%, the shortfall coming in at 5.4% of GDP. And, you know, slow growth across the euro zone and France was a major factor there. But France do aim to reduce their budget deficit to 5%, but that would require significant austerity. And there is this position of political gridlock in France which makes any budgetary progress very difficult. You said at the start, I think France is on its fifth Prime Minister in two years. And this split government has, effectively it makes it very difficult to pass any credible fiscal consolidation plans. The budget for this year was rolled over from 2025 and they couldn't get it through parliament, so it was forced through via a constitutional mechanism without a vote after sort of cross party talks repeatedly failed. And because there is a French election next year in May 2027, there's actually very little incentive for opposition parties to support unpopular austerity measures to bring the deficit, to rein that deficit in. And France still has this 2029 deficit target of 3%, which is obviously unrealistic in this context. And the bond market has really started to notice that these targets are not going to be hit and –

00:06:58:00 - 00:06:59:00
Jane Parry
So, they're pricing that in now.

00:06:59:00 - 00:07:04:00
Tom Hibbert
Yeah, and the political gridlock just makes progress very difficult in France.

00:07:04:00 - 00:07:09:00
Jane Parry
So who actually holds French government bonds and does it matter who holds them?

00:07:09:00 - 00:07:59:00
Tom Hibbert
Yeah, it does. So, France has a pretty low level of domestic ownership of its bond market, which also it creates a structural weakness because domestic owners tend to be more sticky, they don’t buy other countries debt quite as much. Whereas the owners of OATs are basically international and institutional investors that are more sort of speculating on French sovereign rates markets, which does create this structural weakness and has emphasised the vulnerability in recent weeks. I think focusing more on domestic ownership could be and, you know, similar to the UK actually, a way that might provide some sort of, or contribute to, a solution in France. But it's just an interesting area of –

00:07:59:00 - 00:08:11:00
Jane Parry
Dynamic, yeah. So going back to the ECB, the European Central Bank, can they not just step in and buy some of these bonds then to shore up the market a little bit?

00:08:11:00 - 00:08:44:00
Tom Hibbert
There is a mechanism in which they could, which people are speculating on a little bit around the edges now. However, the conditionality of that intervention actually requires France to be in compliance with the EU’s own fiscals and they're not. They're in violation of that at the moment. That could be a barrier that could easily be removed. But, like so many things, it's kicking the can down the road, barriers that are put in place that can just be removed and it's just another area, isn't it?

00:08:44:00 - 00:08:46:00
Jane Parry
Just one big mess, isn't it?

00:08:46:00 - 00:08:48:00
Tom Hibbert
It seems like it.

00:08:48:00 - 00:09:03:00
Jane Parry
So, if France can't agree on cutting spending and sounds like they can't agree on raising taxes because of this political gridlock, what other options might the French government have?

00:09:03:00 - 00:10:53:00
Tom Hibbert
The key thing is really the messages, what are the signs for the UK? And I think that's actually an interesting angle where, you know, Burnham has, and Labour has, an opportunity now because they have a majority to put an actual credible fiscal plan in. The thing that France didn't do was make tough decisions early and they kicked the can down the road. And then now the bond market is really revolting and they're in sort of crisis, getting towards crisis territory. The UK isn't there yet. So, the UK could do a few things now. One is, as I've already said, incentivise domestic ownership of UK assets and gilts. France's low domestic ownership of votes has created this structural weakness, as I've said. And we've heard now, you know, Burnham plans to soften the triple lock, which is where state pensions rise annually by the highest of either 2.5% CPI inflation or wage growth. And that's the kind of tough decision that might be perceived as politically unpopular that French policy makers just haven't been able to make. And now there's this position of gridlock. It's very difficult to make any progress in that regard. The move that's being suggested now by Burnham of moving to a double lock, so dropping the wage growth elements and just having the highest of either 2.5% or inflation, is a step in the right direction. For it to make a material difference, they need to go further effectively. And the other is, I mean, at the moment the appetite is - there's no appetite to fiscally consolidate really, so it's higher taxes. But, what I think France shows is that it's just a reminder of why making hard decisions now rather than leaving it till later is the right thing to do.

00:10:53:00 - 00:10:54:00
Jane Parry
Otherwise the bond market's just going to punish you at some point.

00:10:54:00 - 00:10:56:00
Tom Hibbert
Exactly.

00:10:56:00 - 00:11:11:00
Jane Parry
Yeah. So just briefly, I'm going to assume that most of our clients or investors don't particularly own French government bonds. So, what does all this therefore mean for investors? Why should we care about what's going on in France?

00:11:11:00 - 00:11:53:00
Tom Hibbert
Yeah. I mean, so other than the lessons I think for the UK, because we do have a lot of exposure to UK sovereign bonds, there are obvious concerns about borrowing costs across Europe. So you've got the same similar issues in Italy, you've got similar issues in Greece. Could it become a systemic issue? Can one country's bond market’s issues there sort of spread it to its neighbours? I think that could be a concern. It's just a reminder I think of why we need to monitor these things, be wary of the risks. We are in the midst of this bond bear market at the moment. So just continue to monitor these dynamics and try to position for the risks and the opportunities.

00:11:53:00 - 00:12:38:00
Jane Parry
OK, thank you. Probably a good time to sum up what is in my Canaccord take away coffee cup today. So thank you for the whistle stop tour through the French bond market. I learned a lot. They're called OATs. Did not know that before. And France has probably shown that markets can tolerate high debt, but not this sort of endless delay. It can't keep kicking the can down the road, not making some hard decisions either around austerity, cutting spending or increasing taxes. But the lesson for Britain is that we are not France because we haven't got political gridlock at the moment. The government has got a majority and therefore could make some hard choices at this point before the bond market sets the deadline for them, really.

00:12:38:00 - 00:12:39:00
Tom Hibbert
Yes.

00:12:39:00 - 00:12:43:00
Jane Parry
Yeah, OK. Merci, merci beaucoup

00:12:43:00 - 00:12:44:00
Tom Hibbert
De rien.

00:12:44:00 - 00:13:00:00
Jane Parry
Thank you very much for listening to the Canaccord Coffee Break Podcast today. Hope you've enjoyed it. Please don't forget to hit follow on your podcast channel of choice and you will never miss an episode. And as always, we'd love to hear your thoughts. Drop us an email coffeebreak@canaccord.com.

00:13:00:00 - 00:13:02:00
Tom Hibbert
Thank you everyone.

00:13:02:00 - 00:13:02:00
Jane Parry
Au revoir.

00:13:02:00 - 00:13:03:00
Tom Hibbert
Au revoir.

00:13:03:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested.  Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:22:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I am joined today by the very lovely Tom Hibbert.

00:00:22:00 - 00:00:23:00
Tom Hibbert
Morning, Jane.

00:00:23:00 - 00:00:39:00
Jane Parry
Morning, morning. As you know, each week on the podcast, we try to demystify what's happening in the markets, cut through all the noise, and then hopefully you feel a little bit more informed, confident and in control of your financial future. So this week, Tom, we've got some good news.

00:00:39:00 - 00:00:40:00
Tom Hibbert
We do.

00:00:40:00 - 00:01:18:00
Jane Parry
Stock markets are still climbing, company earnings remain healthy, and economic growth has been surprisingly resilient. All this according to your weekly markets review. But at the same time, we are seeing a bit of upward pressure on bond yields, which we've been talking about for the last few weeks. So there is no escaping the bond yields conversation, I'm afraid to say. But, what I really wanted to look at this week, if everything looks fine, why are investors becoming more nervous? Why are they twitching a little bit around the edges? So let's grab your coffee and dive on in. So first off, because we can't avoid bond markets, what has happened to bond markets in the last week or so?

00:01:18:00 - 00:01:23:00
Tom Hibbert
Yeah. I mean, we've seen, we've spoken about, it seems like every week we're having a very similar – 

00:01:23:00 - 00:01:25:00
Jane Parry
I know. I hope our listeners aren’t fed up with hearing about it.

00:01:25:00 - 00:01:28:00
Tom Hibbert
We're trying to bring more voices onto the podcast, but it's always me again.

00:01:28:00 - 00:01:29:00
Jane Parry
That's because we love your voice, that’s why.

00:01:29:00 - 00:02:31:00
Tom Hibbert
It’s a calendar issue. This is it. There are there are other voices and you will hear from other people, I promise. But yes, we're seeing still a lot of upward pressure on bond yields. There's this narrative now where I think the market consensus is that we do have to see structurally higher bond yields. A lot of this is driven by, you know, we've got this energy supply shock as we know, but also this economic resilience and economic growth as well. Fundamentally, when you do have a robust economic backdrop, bond yields need to be higher. And you know, we're seeing nominal growth in the US of sort of 6-ish percent. Bond yields do need to be higher. So, we're seeing a structural shift higher in bond yields on the back of higher inflation and a relatively robust economic backdrop, particularly that, you know, the US is the central pillar of this growth in development. We’ve got more of a sort of stagflationary environment in Europe and the UK.

00:02:31:00 - 00:02:45:00
Jane Parry
So do you think then is it simply a sign that of a stronger economy and therefore there's quite a lot of positives around that or is it an early warning signal that markets are becoming a little bit more uncomfortable with higher interest rates?

00:02:45:00 - 00:03:05:00
Tom Hibbert
Yeah. I think there is a risk of higher interest rates being a catalyst for turmoil within risk assets. So equities and credit. And what we have seen so far is bond volatility really starting to rise and –

00:03:05:00 - 00:03:07:00
Jane Parry
What do you mean bond volatility?

00:03:07:00 - 00:03:14:00
Tom Hibbert
Yeah. So just the volatility in the bond markets, the price movements are quite aggressively downwards as well.

00:03:14:00 - 00:03:15:00
Jane Parry
So moving around a lot.

00:03:15:00 - 00:04:04:00
Tom Hibbert
Yeah, but tilted towards the downside and typically what you see if you see volatility in bonds that then feeds through into other asset classes as well. So the risk is that although you know, the volatility in equity markets and credit markets is still pretty contained, the risk is that if the bond volatility remains high and bond yields continue to rise, we could see that volatility spread into other markets as well. So, that is the risk and I think it's why investors are becoming a little bit more concerned. But the good news is that this is really being driven by some strong economic data which supports the sort of investment thesis more broadly.

00:04:04:00 - 00:04:10:00
Jane Parry
So it's sort of a question, it sounds like, of whether the rise in bond yields is orderly or disorderly.

00:04:10:00 - 00:04:20:00
Tom Hibbert
It's a great point, it's a great point. And at the moment it's been an orderly rise, I’d say. So there is volatility -

00:04:20:00 - 00:04:21:00
Jane Parry
But it's been an orderly rise.

00:04:21:00 - 00:04:48:00
Tom Hibbert
But it's not like volatility has, it's not a crash. So volatility can really spike higher and we're seeing a rise in volatility and bond prices are falling, bond yields are rising. But it's not panic. It's been an orderly sell off and a shift to a structurally higher yield environment. If this negative momentum builds and you really start to see bond prices fall, bond yields rise -

00:04:48:00 - 00:04:49:00
Jane Parry
So more disorderly.

00:04:49:00 - 00:04:56:00
Tom Hibbert
More disorderly, then I think that the red flags would start to rise and you'd see that volatility in other asset classes rise as well.

00:04:56:00 - 00:05:07:00
Jane Parry
So that's what investors maybe are slightly nervous about. If that becomes more disorderly, that might spread into other asset classes. And therefore, we're looking at a different situation.

00:05:07:00 - 00:05:08:00
Tom Hibbert
Exactly right.

00:05:08:00 - 00:05:15:00
Jane Parry
But as you say, with economic resilience, strong corporate earnings that's sort of defending against that at the moment.

00:05:15:00 - 00:05:16:00
Tom Hibbert
Exactly.

00:05:16:00 - 00:05:36:00
Jane Parry
OK. I think I've got that. OK. So I can see that investors might be a little bit nervous that this could potentially spread into other asset classes just because of the disorderly nature of it rather than the yields per se.  So what does that mean then? How does this challenge equity valuations?

00:05:36:00 - 00:06:48:00
Tom Hibbert
Yeah. I've kind of framed it in kind of a quantitative manner where I've said bond volatility is higher. And typically you see then that feed through, if a real spike in volatility, that feeds through to equities and credit volatility as well. So maybe I should explain it as you suggest more qualitatively and I think the way to look at it is bond yields are effectively borrowing costs for governments and also for companies or it influences corporate borrowing costs as well. If those borrowing costs rise, that impacts future company profits and equity markets directly. So that's the first thing. But also there are some indirect influences as well. Whereas if interest rates are higher, that incentivises people to save rather than spend. So you have lower consumption, you have less investment, less investment in in equities because you get a higher return from safer cash. So it impacts demand, reduces demand in the economy and increases saving at the same time. So there are some direct and indirect influences of higher bond yields that feed through the economy.

00:06:48:00 - 00:07:00:00
Jane Parry
And I guess people don't just invest in shares or cash or bonds in isolation. They're looking at the relative return of each of those asset classes when deciding what you're doing that on their behalf when deciding to build a portfolio.

00:07:00:00 - 00:07:01:00
Tom Hibbert
Exactly.

00:07:01:00 - 00:07:05:00
Jane Parry
Yeah, OK. So should investors be worried right now then, given all that you've just said?

00:07:05:00 - 00:07:47:00
Tom Hibbert
Yeah, I think if you look at the economic data that's coming through, it's still pretty solid and the corporate landscape is particularly robust and we've seen now a number of consecutive quarters of double-digit earnings growth. I think the issue is, as I've said, this sort of bond volatility and the upward pressure. Right now, given that the selloff is orderly, we aren't hugely concerned. I think it's actually healthy that the equity markets can adapt and absorb higher bond yields as long as that move is orderly. I think the risk is if you start to see higher volatility and more panic and a disorderly sell off, we'll see that feed through into other asset classes as well.

00:07:47:00 - 00:08:09:00
Jane Parry
And what about politics? I'm just conscious that the Labour Party conference is being held this week and so there's a lot of flags being flown or kites being flown. There are a lot of kites being flown from the Labour government. And I've just wondered what is the impact of politics? When does that start to matter in all of this?

00:08:09:00 - 00:08:22:00
Tom Hibbert
I think that at the moment the bond sell off has been driven by the US and the US market and some of that is just international owners don't want to to hold treasuries, they're selling treasuries and buy more domestic bonds.

00:08:22:00 - 00:08:23:00
Jane Parry
Treasuries being the US.

00:08:23:00 - 00:09:57:00
Tom Hibbert
The US Treasuries, yeah, but this is feeding through to all developed government bonds, which are, you know, almost partly derivative of U.S. treasuries. I think if you look at the UK, it obviously has its own issues, as does a lot of the developed world. The US is spending a vast amount of money running a really significant sort of 6 to 7% budget deficit. We're seeing a huge issue in in France, the French government where, you know, they have this position of political stalemate. And I think the UK is in a better position than France in particular for the time being. But the issue is, you know, if you look at the budget in October, a lot of people look at that as being a potential catalyst. I think this government is very aware of the risks of having a too sort of fiscally irresponsible budget. And in my view, I don't think Healey will do anything particular. He'll try and do as little as possible, might put taxes up somewhere given there's no appetite to slow to slow spending. So I don't think there's a huge risk of volatility around the budget. I say that cautiously. I think the real risk could be if the UK starts to go down more of the path that France has gone down, where more political turbulence creates greater risk and particularly when nothing actually can get achieved from a policy perspective. I think that could be the issue.
 
00:09:57:00 - 00:09:59:00
Jane Parry
OK, so a bit of a watch out there.

00:09:59:00 - 00:10:11:00
Tom Hibbert
Bit of a watch out there and the volatility and risk in equity markets, is the upward pressure on bond yields impacting equity valuations in a more pernicious manner.

00:10:11:00 - 00:10:45:00
Jane Parry
Pernicious. That's a good way to end the podcast today. Let me sum up what is in my Canaccord take away coffee cup. So, we've talked about the bond market again this week, even though we'd have loved to have talked about something else. But we've concluded it's perhaps not the higher yield, the higher interest rates that are worrying markets themselves. It's more whether it's orderly or disorderly and it's rising too, far too fast and it feels disorderly. Then the margin for error, it's getting smaller I guess, and how that affects other asset classes. Anything else to add to that?

00:10:45:00 - 00:10:46:00
Tom Hibbert
I think you nailed it.

00:10:46:00 - 00:11:04:00
Jane Parry
Thank you, thank you very much. Thank you for listening to the Canaccord Coffee Break Podcast today. We hope you've enjoyed it. And as ever, don't forget to hit follow so you never miss an episode and drop us a line. We'd love to hear your thoughts. The email address is coffeebreak@canaccord.com. Thank you.

00:11:04:00 - 00:11:05:00
Tom Hibbert
Thank you everyone.

00:11:05:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:22:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break Podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I'm delighted to be joined by Tom Hibbert from our Chief Investment Office.

00:00:22:00 - 00:00:23:00
Tom Hibbert
I'm back again.

00:00:23:00 - 00:00:44:00
Jane Parry
Back again, morning, morning. And Tom, you are here this week to help us cut through the noise all about central banks and inflation, help us understand what's happening in the markets, and then hopefully, our listeners will feel more informed, confident and in control of their financial future. So central banks turned more hawkish.

00:00:44:00 - 00:00:45:00
Tom Hibbert
Yes, they did.

00:00:45:00 - 00:00:57:00
Jane Parry
So I want to understand why. For listeners who are a bit like me, I have to remember Hawkish is flying high, rates flying high, Dovish is rates going down, doves fly low.

00:00:57:00 - 00:00:58:00
Tom Hibbert
Exactly.

00:00:58:00 - 00:00:59:00
Jane Parry
So we're hawkish. We're going up this week.

00:00:59:00 - 00:01:00:00
Tom Hibbert
We're going up.

00:01:00:00 -00:01:06:00
Jane Parry
The US Federal Reserve raised interest rates for the first time, I think, since 2023.

00:01:06:00 - 00:01:12:00
Tom Hibbert
That's right. And that's the big story, I suppose, of the week. Less interesting, from the Bank of England.

00:01:12:00 - 00:01:31:00
Jane Parry
OK. But you love America, so let's stick with that. So raised interest rates by 25 basis points and also signalled further potential hikes, whereas the Bank of England held its rate, but we saw three of the Monetary Policy Committee members back an immediate increase. So a bit of noise going on there.

00:01:31:00 - 00:01:33:00
Tom Hibbert
A bit of a hawkish hold.

00:01:33:00 - 00:01:35:00
Jane Parry
A hawkish hold, like it.

00:01:35:00 - 00:01:36:00
Tom Hibbert
Let's say that.

00:01:36:00 - 00:01:44:00
Jane Parry
Yeah, a hawkish hold there, hovering above the motorway. And then the third area was the Bank of Japan, who also raised rates. So OK, grab your coffee.

00:01:44:00 - 00:01:46:00
Tom Hibbert
Let's get into it.

00:01:46:00 - 00:01:55:00
Jane Parry
Let's dive on in. Right, first off, is this all about rising inflation? Is that the reason that central banks are becoming more hawkish?

00:01:55:00 - 00:02:23:00
Tom Hibbert
Yes, definitely. Rising inflation pressures. And in the US, we stick to the US, we see inflationary pressures really building in two areas. First is obviously there's a global energy supply shock and actually the US is more insulated against that than other economies. But nonetheless, Brent oil, which is more of a global oil price, above $100 a barrel, energy price, high energy prices, oil prices up sort of 70% year to date. 

00:02:23:00 - 00:02:24:00
Jane Parry
70%?

00:02:24:00 - 00:02:33:00
Tom Hibbert
Yeah, I mean that has obviously inflationary consequences and knock on effects, everything is a derivative oil –

00:02:33:00 - 00:02:35:00
Jane Parry
Yeah, so it's not just petrol at the pump.

00:02:35:00 - 00:03:10:00
Tom Hibbert
So it's not just petrol at the pump, it impacts the price of everything from food through to all goods really. So inflationary pressures rising on the back of the geopolitical turbulence and that's obviously in escalatory territory at the moment again, so that's coming to the fore. And at the same time, you have this vast investment around AI which is also putting upward pressure on prices. So that's something that we're looking at the moment as well and – 

00:03:10:00 - 00:03:25:00
Jane Parry
Is that the AI supply and demand? Because there's so much going into the AI build out that they're demanding more and more chips and data centres and property and big sheds to build it all and put it in and energy. Is it all to do with that?

00:03:25:00 - 00:03:44:00
Tom Hibbert
All to do with that. And I suppose the idea is that AI adoption, as the benefits of AI adoption filter through the economy that produces productivity gains and those productivity gains will effectively mean that AI is deflationary. And at the moment it's that.

00:03:44:00 - 00:03:46:00
Jane Parry
It's all about the investment into it.

00:03:46:00 - 00:03:52:00
Tom Hibbert
It's still the investment into it which is the biggest factor and it's a little bit like a sort of leprechaun's gold, you know when you -

00:03:52:00 - 00:03:54:00
Jane Parry
Oh, Leprechaun's gold, go on.

00:03:54:00 - 00:04:25:00
Tom Hibbert
Yeah, when there's a pot of gold at the bottom of a rainbow and you say, oh, this AI is going to be fantastic. They have this fantastically deflationary effect, but it's not yet - the closer we get, the further away that seems to be happening. So we're obviously quite a way through now, AI is being adopted. The benefits are filtering through the economy, but the scale of the investment is still the dominant factor driving prices. So the AI build out is still having a net positive impact upon prices.

00:04:25:00 - 00:04:42:00
Jane Parry
Yeah, OK, makes sense. So let's touch on, just before we talk about the Fed and what the Fed did last week, just want to be clear, so the reason the central banks, in particular the Fed, put interest rates up when there's inflationary pressure, and that's going up, what’s the reason for that?

00:04:42:00 - 00:05:00:00
Tom Hibbert
It’s to restrict demand. In very simple terms, that's effectively how it works. So if debt costs go up, more money needs to go towards paying your debt. It disincentivises investment and incentivises saving. So it effectively reduces –
 
00:05:00:00 - 00:05:11:00
Jane Parry
So if you're paying on corporate loans, corporate bonds, personal mortgages, there's just less money going around in circulation to spend on other things, which reduces inflation.

00:05:11:00 - 00:05:20:00
Tom Hibbert
Yeah. So that that's how it works and you know it's interesting because this hike, although I think it is necessary, some of it is supply side inflation.

00:05:20:00 - 00:05:22:00
Jane Parry
Supply side, what do you mean by that?

00:05:22:00 - 00:05:48:00
Tom Hibbert
Energy prices driven by an energy supply shortage rather than demand. There's not much need to cut demand. It's not going to impact the oil price. So I think where we're seeing in the US, the inflationary pressure has driven more on the demand side, which is the AI pulled out. That is the interesting dynamic for Kevin Warsh, I think, and since taking on.

00:05:48:00 - 00:05:50:00
Jane Parry
So Kevin Warsh - 

00:05:50:00 - 00:06:55:00
Tom Hibbert
Who’s the chair of the Fed and since taking the helm and the Fed, he had spoken, he's spoken quite tough on delivering price stability, but he hasn't done much yet. And that's not actually saying anything against him. He hasn't had much of an opportunity to do anything. There was no meeting in August. His first meeting was in July and he held interest rates steady at that meeting. The bond market in the last few months has been calling, demanding action, not just tough talk and inflation. So the Fed has been almost forced to deliver an interest rate hike in this meeting. Otherwise, I think the negative momentum in the bond market that we've spoken about would have likely accelerated. So this is really a hike that's been demanded by the bond market. Kevin Warsh and the Fed have delivered with a unanimous 12 to 0 vote on the federal labour market policy that sets interest rates. So it's just been a very interesting few weeks for the bond market and an interesting period for Kevin Warsh at the start of his term.

00:06:55:00 - 00:06:58:00
Jane Parry
So he's now walking the walk, having talked tough.

00:06:58:00 - 00:07:01:00
Tom Hibbert
That's a great way to phrase it yeah.

00:07:01:00 - 00:07:03:00
Jane Parry
OK, great. What does it all mean for investors then?

00:07:03:00 - 00:07:11:00
Tom Hibbert
Yeah, I mean, it's a good point. I think we spoke last week, we recognise that we are now in a structurally higher interest rate regime.

00:07:11:00 - 00:07:12:00
Jane Parry
Yes, we did.

00:07:12:00 - 00:07:43:00
Tom Hibbert
And that has huge consequences for the global economy. We have to be aware of the inflationary pressures that are building but also recognise the fact that actually the corporate landscape is still very good, corporate earnings are still very good. During periods of strong economic growth, one of the reasons Warsh is hiking is because the economic data has been very positive. We saw retail sales surprise to the upside. The GDP growth expectations for this quarter are running really well above -

00:07:43:00 - 00:07:44:00
Jane Parry
Still in the US, we’re talking about?

00:07:44:00 - 00:08:51:00
Tom Hibbert
In the US, yeah. I mean, the US economy is really growing, it’s quite resilient and quite strong. So when you have strong economic growth, interest rates do need to be higher. And this is sort of where we are at the moment. It's not necessarily, I mean the equity market doesn't seem to be shrugging off higher interest rates at the moment. It's been shrugging off largely the rises in bond yields. So we're not hugely concerned. I think it's good that Warsh has now delivered this interest rate hike and that should actually alleviate the upward pressures on bond yields because the bond market has been saying to the Fed you need to hike rates. And it's still, you know, the what the bond market is pricing in is still more hawkish than what's the Federal Reserve is guiding towards from an interest rate perspective. So I don't think that this is actually anything to be massively concerned about. It's more a statement of, you know, the economy is growing, quite strong, inflationary pressures are building. We need higher interest rates and we are in an environment now where interest rates are going to be higher on average and bond yields are going to be higher on average.

00:08:51:00 - 00:08:53:00
Jane Parry
Almost just to let a little bit of steam out.

00:08:53:00 - 00:08:55:00
Tom Hibbert
Yeah.

00:08:55:00 - 00:08:59:00
Jane Parry
OK. So, the market is sort of absorbing it all, but not panicking at this point.

00:08:59:00 - 00:09:00:00
Tom Hibbert
Exactly.

00:09:00:00 - 00:09:43:00
Jane Parry
Yeah, OK, great. Probably time for me to sum up what's in my Canaccord take away coffee cup this week. I think it's a 3 layered coffee. I don't know what those are called, but you know ones where you can see them in the glass jar. And so first thing is that this isn't really a story about central banks. It's really a story about oil, we talked about, and how central banks are responding to that increasing oil price. Second, it's about the AI boom and that may be adding to prices before it starts reducing them, but it is definitely stoking inflation. And then third, as we were just saying, markets have seemed to have taken this largely in their stride so far this year, which is a reminder as you say that a single rate decision is rarely a reason to change a long-term investment plan.

00:09:43:00 - 00:09:59:00
Tom Hibbert
I think the interesting point is, one is the Fed has left the door open for another interest rate hike. So there are, the trajectory is upwards for interest rates. And second, yes, the equity market is a bit range-bound at the moment.

00:09:59:00 - 00:10:00:00
Jane Parry
Range-bound?

00:10:00:00 - 00:10:31:00
Tom Hibbert
It's sort of been a bit choppy heading into the midterms. There have been pressures in bond markets that I've spoken about which creates some vulnerability for equities. But I think now that we've got the Warsh who's shown himself to be a credible monetary policy maker and I think that should alleviate some of the bond market pressures, once we get through the midterms and that uncertainty is removed, I think the outlook for equity markets is actually pretty good as we head into the final quarter.

00:10:31:00 - 00:10:33:00
Jane Parry
Great. Well, thank you very much.

00:10:33:00 - 00:10:34:00
Tom Hibbert
Thank you.

00:10:34:00
Jane Parry
Thank you for listening to the Canaccord Coffee Break Podcast today. I hope you've enjoyed it. And don't forget to hit follow on your preferred podcast channel of choice and you will never miss an episode. And as always, we'd love to hear your thoughts, your comments and emails. Drop us a line coffeebreak@canaccord.com. Thank you.

00:10:52:00 - 00:10:53:00
Tom Hibbert
Thanks for listening.

00:10:53:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:22:00
Jane Parry
Good morning, and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I am delighted to be joined by Tom Hibbert from my Chief Investment office. Morning, morning.

00:00:22:00 - 00:00:24:00
Tom Hibbert
Hello, good morning.

00:00:24:00 - 00:00:47:00
Jane Parry
As you know, each week Tom is here to help us cut through the noise, demystify what's happening in the markets, and hopefully help you feel more informed, confident, and in control of your financial future. Now this week, Tom, the big headline is that the 10-year U.S. treasury gilt yield has passed 5%.

00:00:47:00 - 00:01:04:00
Tom Hibbert
Yes, yes. Sorry to talk about bonds again, but they’re in the headlines and the rise in yields this month has been quite sharp again. So it's good to talk about this, this 10-year yield, it's a very symbolic level.

00:01:04:00 - 00:01:06:00
Jane Parry
Yeah, reference point, isn’t it.

00:01:06:00 - 00:01:13:00
Tom Hibbert
Yeah, exactly. For global bond markets, the US 10-year yield is probably the most central to global financial -

00:01:13:00 - 00:01:16:00
Jane Parry
Why is it seen to be a reference point then?

00:01:16:00 - 00:01:35:00
Tom Hibbert
It's, well it has huge implications for the global economy, a lot for equity markets, the US bond market is the biggest bond market in the world. It's just a widely used reference rate for the cost of money, which is set, you know, in a global sense, by the US government.

00:01:35:00 - 00:01:46:00
Jane Parry
So depending on what the 10-year U.S. treasury is doing, it could influence all of our mortgages or corporate loans, personal loans.

00:01:46:00 - 00:01:54:00
Tom Hibbert
Yeah. And the 5% level doesn't actually mean much, really, you know, in a literal sense. It doesn't actually sort of trigger some something.

00:01:54:00 - 00:02:00:00
Jane Parry
Yeah, but the financial press get very exercised about it being a symbolic amount, a symbolic level.

00:02:00:00 - 00:02:29:00
Tom Hibbert
It’s a very symbolic marker, and we've seen it briefly touch that level at some point in the last couple of years and then has fallen back down. Right now it's done that again. So it's at exactly 5% as we speak and you know it is just a level that I think is seen as a different structural regime for the bond markets. This shift higher in bond yields is seen as part of a structural move where bond yields are going to be higher for the future from here.

00:02:29:00 - 00:02:32:00
Jane Parry
OK. So it's important that we talk about it then.

00:02:32:00 - 00:02:36:00
Tom Hibbert
Yeah, it's a significant level. That shouldn't be understated.

00:02:36:00 - 00:02:49:00
Jane Parry
So perhaps then, give us a brief canter through modern American history and how did this 10-year Treasury rate, sort of reflect what was going on in the economy at the time?

00:02:49:00 - 00:02:56:00
Tom Hibbert
Yeah, and you have to go all the way back really to the late 60s, early 70s - 

00:02:56:00 - 00:02:57:00
Jane Parry
So we're in our flares now.

00:02:57:00 - 00:03:00:00
Tom Hibbert
I went to a Studio 54 party the other day.

00:03:00:00 - 00:03:02:00
Jane Parry
Did you? What did you wear?

00:03:02:00 - 00:03:04:00
Tom Hibbert
I wore my dad's actual clothes from the time.

00:03:04:00 - 00:03:07:00
Jane Parry
Did you?  Wow, purple flares?

00:03:07:00 - 00:03:18:00
Tom Hibbert
Not purple flares, I wore a very frilly white shirt, some sparkly braces, some black shoes with heels on.

00:03:18:00 - 00:03:19:00
Jane Parry
Nice platforms.    

00:03:19:00 - 00:03:22:00
Tom Hibbert
Yeah, platforms, exactly. Yeah, it was fantastic fun. Anyway, where was I?

00:03:22:00 - 00:03:27:00
Jane Parry
So, we're back in the 1970s and we're in flares. 

00:03:27:00 - 00:04:02:00
Tom Hibbert
Yeah. OK, so the 1970s, there was through that whole decade, there was structurally high inflation. Richard Nixon abandoned Bretton Woods early on in the decade. Then you had two Gulf wars and it took until the end of that decade until Fed chair Paul Volcker hiked rates to 20%, really high, to finally slay the inflationary dragon. The US 10-year yield hit almost 16% during that period.

00:04:02:00 - 00:04:05:00
Jane Parry
So we're worrying about 5% now, but that's in context of that - 

00:04:05:00 - 00:05:05:00
Tom Hibbert
In the context of that exactly. And then through the 80s, all the way through really to the global financial crisis, you have falling yields, yields fell, inflationary pressures were falling and inflation was falling. Then you have the global financial crisis in 2008 and that ushered in this new era of bond market manipulation by the Federal Reserve. So the Fed started this quantitative easing program and artificially forced bond yields lower. And most people's careers in the city today have been spent in this ultra-low yield environment. It's cheap from a policy perspective, this era of cheap, artificially cheap money. My career, for example, started in 2010, and this is a new regime that we are now entering.

00:05:05:00 - 00:05:20:00
Jane Parry
I'm not going to talk about when my career started, but it was a lot longer than that, so I can remember some of the other stuff. So what happened then? If that happened in the 2008 financial crisis and yields went down to extraordinary lows, what triggered a change? What do you say early 2022?

00:05:20:00 - 00:06:30:00
Tom Hibbert
I would go back to 2020 to COVID because that was the penultimate final throes of this, of this ultra loose regime, where you had a huge amount of liquidity through quantitative easing and a lot of fiscal stimulus as well, which creates a huge amount of artificial demand. There's tons of cash, money supply is huge. So it creates demand and creates inflationary pressure as well. And at the same time, you know, the economy had been switched off for years during lockdowns. So you can't just, you know, in 2021, flip the switch and turn the economy back on without having supply chain disruptions. So there was this sort of very big imbalance between money supply and demand and the supply side of the economy. Then you had things like Russia's invasion of Ukraine, which created a bit of an energy shock, more supply chain disruptions, which, you know, further stoked the flames of inflation and officially ended this era of quantitative easing.

00:06:30:00 - 00:06:38:00
Jane Parry
OK. So although we've seen the 5% rate now, really this stems back to 2021-2022.

00:06:38:00 - 00:06:51:00
Tom Hibbert
Yes. And even, you know, nobody really knows what the implications are of higher bond yields. People have been surprised; investors have been surprised at equity markets’ resilience and the global economy's resilience to higher bond yields.

00:06:51:00 - 00:07:00:00
Jane Parry
So it doesn't automatically signal a fiscal crisis or recession. Does it imply risks for the equity markets?

00:07:00:00 - 00:07:05:00
Tom Hibbert
It does, but nobody knows precisely what the tipping point is.

00:07:05:00 - 00:07:07:00
Jane Parry
Because the economic fundamentals are still holding up right?

00:07:07:00 - 00:07:41:00
Tom Hibbert
They're still holding up. And it's been, the resilience has surprised a lot of investors. So you go to the end of 2022, Bloomberg's economics model put the probability of a recession at that time at 100% and that just didn't happen. So that was surprised a lot of people. Right now, the probability of recession I would say is still seen as being relatively contained. But the more bond yields rise and particularly above this symbolic level of 5%, which is fresh highs for this cycle, that builds the pressure on the equity markets.

00:07:41:00 - 00:07:45:00
Jane Parry
What level would be more significant then, against this backdrop?

00:07:45:00 - 00:08:12:00
Tom Hibbert
Yeah, as I say, it's difficult to say because there's no precise tipping point where suddenly it you know, it all breaks. But I would say a move towards 6 or 7 would be structurally more significant. And you know, those levels would imply more turmoil for equity markets and have a great impact on American consumers, for example.

00:08:12:00 - 00:08:17:00
Jane Parry
And presumably closer scrutiny of financing costs and the impact on corporate profitability.

00:08:17:00 - 00:08:51:00
Tom Hibbert
Yeah. That's a really good point. So right now, we're seeing the some of the biggest companies, the hyperscalers, issue a lot of money, a lot of debt, sorry, to funds their AI investment cycle. If those yields continue to rise, their borrowing costs will continue to rise and that will have some effects for the economics of the AI cycle as well, and the borrowing costs for those companies. So it has huge knock-on effects and it's an interesting point for the global economy at this stage.

00:08:51:00 - 00:08:59:00
Jane Parry
Hence I suppose why this is not really about 5% the number itself, more this is a transition - 

00:08:59:00 - 00:09:29:00
Tom Hibbert
It’s a moment when people sit up and say we are in a structurally higher for longer environment. This is new for most people's careers and we should pay attention for potential implications in, you know, in the equity market in particular, which you know does look on a historic basis, on a price to earnings basis, quite expensive relative to the bond market. And you know, that's not to say that we're still not optimistic on equities because corporate fundamentals are still very robust.

00:09:29:00 - 00:09:39:00
Jane Parry
So while corporates are still growing and the underlying economic fundamentals are strong, they can afford to pay a higher cost for borrowing their debt.

00:09:39:00 - 00:10:03:00
Tom Hibbert
Yeah, that's right. And while the earnings strength and the earnings growth is still there, you know, maybe that justifies elevated valuations. But we just need to be wary of the negative momentum in the bond market, the upward pressure on bond yields, and the fact that this very symbolic reference rate for the global economy of the 10-year Treasury yield has surpassed 5%.

00:10:03:00 - 00:10:50:00
Jane Parry
So keep a close watching brief, please. Thank you. So let me sum up what's in my Canaccord take away coffee cup this week. The world's most important interest rate, the US 10-year Treasury, has passed its 5% yield for the first time in nearly two decades. But the real story actually isn't that number. It's more the potential move to a new era after 15 years of near free money. And we've entered a new regime where we’re borrowing costs again. So history says 5% is a transition point, not a breaking point. The headline isn't panic, it's perspective. But we will keep close to it.

00:10:50:00 - 00:10:52:00
Tom Hibbert
I think that's a good way of phrasing it.

00:10:52:00 - 00:11:14:00
Jane Parry
So thank you very much, thank you for listening, thank you for your time today, and I hope you enjoyed the Canaccord Coffee Break Podcast. If you did enjoy it, please don't forget to hit follow on your preferred podcast channel of choice and you will never miss an episode. And as always, we'd love to hear your thoughts. Drop us an email. The email address is coffeebreak@canaccord.com. Thanks.

00:11:14:00 - 00:11:15:00
Tom Hibbert
Thank you.

00:11:15:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:22:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I am delighted to be joined today by Tom Hibbert from my Chief Investment Office.

00:00:22:00 - 00:00:23:00
Tom Hibbert
Good to be back.

00:00:23:00 - 00:00:25:00
Jane Parry
Morning, morning. Yeah, it's good to be back. I missed you last week.

00:00:25:00 - 00:00:27:00
Tom Hibbert
Was I away last week? I was here last week.

00:00:27:00 - 00:00:29:00
Jane Parry
You were here, but I wasn't.

00:00:29:00 - 00:00:31:00
Tom Hibbert
Of course. Yeah, that's right.

00:00:31:00 - 00:00:32:00
Jane Parry
How time flies.

00:00:32:00 - 00:00:34:00
Tom Hibbert
Yeah, well, we're doing more bonds today.

00:00:34:00 -00:01:12:00
Jane Parry
Doing more bonds, I mean, what happened to the bond market whilst I was away? That's what I want to know. As you know, each week on the podcast, we do try to cut through the noise of what's going on in the markets. And in this week's episode, we are definitely talking about the bond markets. And then hopefully you can feel more informed, confident and in control of your financial future. Over the last 15 years, governments have got used to borrowing really cheaply. But in the last week, the bond markets are reminding governments that that era of cheap money is definitely over. And they've pushed borrowing costs to their highest level since the financial crisis, I think.

00:01:12:00 - 00:01:15:00
Tom Hibbert
Yeah. And I would frame it more of this hasn’t all happened in the last week.

00:01:15:00 - 00:01:18:00
Jane Parry
No, just whilst I was on holiday.

00:01:18:00 - 00:01:37:00
Jane Parry
But the last few years since 2022, really, we've seen a sharp increase in government borrowing costs globally, but last week we've seen a quite a strong pattern. The last few months I'd say we've seen strong or sharp rises in in government bond yields.

00:01:37:00 - 00:02:22:00
Jane Parry
But also, this week, we heard from the new chancellor, John Healey, who made his first major economic speech, and he's arguing that growth is the answer to all these problems. So I want to talk about that in a little bit more detail. We have heard that before. And then I think we just need to help our clients and investors understand what's going on and what they need to think about going forward. So, grab your coffee. Let's dive on in. So we've talked about the era of cheap money being over, but investors are now asking, can governments keep borrowing and spending at current levels if inflation remains stubbornly high? So what is happening now? We just touched on it a minute ago, but -

00:02:22:00 - 00:02:57:00
Tom Hibbert
Yeah. So I think the inflation component is important because you know, if inflation is higher, investors want to be compensated above inflation so that you know, you have higher bond yields to compensate for those higher inflation expectations. But although that is an important factor, the key thing that is creating real vulnerabilities in the UK and France and the US is the fiscal sustainability of current government policy, that governments are spending too much.

00:02:57:00 - 00:02:58:00
Jane Parry
Yeah, basically.

00:02:58:00 - 00:03:31:00
Tom Hibbert
And the UK is, I mean, it's vulnerable to this because there's low growth as well and that's an issue. But the UK has a debt to GDP ratio of 100%. So it actually makes the maths quite easy. The UK runs a budget deficit of 3 1/2 percent of GDP. So it's spending more than it's bringing in in tax revenues. And then the ongoing total cost of debt is about 4 1/2%. So that's the weighted average yield to maturity on UK gifts.

00:03:31:00 - 00:03:37:00
Jane Parry
So that's what a government is paying on average for borrowing, 4 1/2% per annum.

00:03:37:00 - 00:03:50:00
Tom Hibbert
Exactly. So let's say then you have the 3 1/2 percent budget deficit, you've got 4 1/2 percent debt costs. That's total about 8% of of debt growth and debt costs. If you have – 

00:03:50:00 - 00:03:51:00
Jane Parry
Per year.

00:03:51:00 - 00:04:05:00
Tom Hibbert
Per year, yeah. If you have inflation of 3%, that means that, so the 8% minus the 3%, because inflation erodes debt, you have a leftover sort of 5%.

00:04:05:00 - 00:04:07:00
Jane Parry
Yeah, your net position.

00:04:07:00 - 00:04:15:00
Tom Hibbert
Exactly, so if the UK economy grows by 5% a year, the debt to GDP ratio sort of stays at 100%.

00:04:15:00 - 00:04:17:00
Jane Parry
So you don't chip away at it, you're still only flat.

00:04:17:00 - 00:04:55:00
Tom Hibbert
You're still exactly, you're still only flat and the UK economy is growing at about 1% and that's broadly been the sort of trend rate, a bit over 1%, sort of been the trend rate since the global financial crisis. So the UK’s rate of growth is well below the break even rate to stop the debt growing relative to the UK economy and that is the concern for bond investors today and bond investors are demanding a higher risk premium given the fiscal trajectory of the UK and the lack of appetite to stop spending or reduce excessive spending.

00:04:55:00 - 00:05:02:00
Jane Parry
So no wonder John Healey is talking about growth. He's got to get it from 1% to at least 5%.

00:05:02:00 - 00:05:04:00
Tom Hibbert
Yeah, or reduce spending.

00:05:04:00 - 00:05:07:00
Jane Parry
Or reduce spending. Yeah, OK, that sounds quite a challenge to me.

00:05:07:00 - 00:05:08:00
Tom Hibbert
Exactly.

00:05:08:00 - 00:05:16:00
Jane Parry
So that's why the bond markets, the bond vigilantes are giving the government, not just in the UK but globally, a bit of a bloody nose at the moment.

00:05:16:00 - 00:05:23:00
Tom Hibbert
Yeah, and the UK is more vulnerable than European peers. It's more vulnerable than the US because the US economy is growing.

00:05:23:00 - 00:05:25:00
Jane Parry
Why is it more vulnerable? Because we're not growing?

00:05:25:00 - 00:05:36:00
Tom Hibbert
Yeah, but it's the low growth and also the inflation question as well. The UK is more sensitive to European economies or to this supply, energy supply shock. Bond vigilantes is an interesting term. We use it quite a lot. And I think we're,  I sometimes say the bond vigilantes are lurking just underneath the surface of the bond markets. They're no longer lurking underneath the surface. They've risen above and they are driving the bond markets, and they're in the driving seat. And it reminds me of James Carville, who was a political adviser to President Clinton, and he had this great quote about the bond market. He says, I used to think that if there was reincarnation, I wanted to come back as the president or the Pope or a baseball hitter. But now I'd like to come back as the bond market. You can intimidate everybody and the bond market is intimidating authorities at the moment. Bond vigilantism, obviously, it's not an organised group, but it's a term that refers to the underlying investors who in aggregate have this vast power, the bond market investors. The bond market should be a free market, but it certainly hasn't been a free market. You look at the last 15 years, which you referred to. But when it is and when you have these questions around fiscal credibility and inflation, the bond vigilantes will demand higher yields and higher compensation for those risks. And that's something that we're seeing at the moment.

00:07:01:00 - 00:07:08:00
Jane Parry
Yeah, OK. Quite right. So it's the risks and it's your longer-term return on your investments over inflation. Otherwise, your money's going backwards.

00:07:08:00 - 00:07:09:00
Tom Hibbert
Exactly.

00:07:09:00 - 00:07:24:00
Jane Parry
Right so John Healey's first major speech talking about growth, saying growth is the answer. If we're currently growing at 1% and you're saying we need to be growing at least 5% just to stay still, that sounds quite a challenge to me.

00:07:24:00 - 00:08:35:00
Tom Hibbert
Yeah, his speech, he spoke a lot about fiscal discipline, which, you know, I think really means for this government a likelihood of higher taxes because there isn't any interest in fiscal consolidation. There's no real interest in or appetite to reduce spending. So fiscal discipline therefore, by definition, means higher taxes, which is why he's not ruling out higher taxes. He mentioned in the speech giving more control to local authorities and greater state control, generally, greater control of infrastructure spending and things like that. And you sort of got undercurrents of Andy Burnham's Manchesterism, this removal of or broadening of power away from elites in London. I'm not sure how these things really help deliver that fiscal discipline. And then he's talks about this, you know, this stuff about delivering growth and he uses the term wealth creation. And I certainly don't hear much from a policy perspective that will deliver those things. There's not a huge amount that is substantive from a broader policy perspective.

00:08:35:00 - 00:08:42:00
Jane Parry
And I guess with a higher debt burden as you were talking about, there's just less room for governments to make mistakes. There's no wriggle room, is there?

00:08:42:00 - 00:09:12:00
Tom Hibbert
Yeah, and it's a bit of a vicious cycle. You have rising bond yields. That means higher borrowing costs for the government. The cost of servicing that debt goes up. The 10 year gilt yield last week, sort of midweek, hit 5.29%, which is the highest level since 2007. The 30 year yield touched 5.9% heading towards 6%. That's a level that hasn't been seen since 1998.

00:09:12:00 - 00:09:18:00
Jane Parry
Wow, OK. So does all this mean that bonds are finally paying a meaningful income then to investors?

00:09:18:00 - 00:10:01:00
Tom Hibbert
Yes, but also the prices of those bonds are falling when bond yields are rising. So you don't want to be holding the bonds while this upward pressure persists. So you might be getting a better yield to maturity when you buy those bonds, but if yields continue to rise, actually you're losing money. So really the key question is where are yields going to go from here? And because of this vicious cycle, you know, bond yields go up, interest costs go up, the surge in yields that we've seen in the last few weeks has eroded about half of the fiscal headroom that Rachel Reeves left Healey. So it's putting more pressure on the government.

00:10:01:00 - 00:10:07:00
Jane Parry
So do bonds have a role then in portfolios for clients?

00:10:07:00 - 00:10:11:00
Tom Hibbert
Yes, they do.  You need to be aware of the risks.

00:10:11:00 - 00:10:13:00
Jane Parry
Like any investment though.

00:10:13:00 - 00:11:01:00
Tom Hibbert
Yeah. And in our portfolios, our central portfolios, we have cautiously been adding to gilts over the course of the last year. And actually we've made a positive return from gilts because you still earn the yield when you know when you buy gilts and if they offer a higher yield, you do generate that yield. There's also this great asymmetry when you own bonds. So a good example of this would be if you bought the 10-year gilt with a 5.28% yield as you could have done last week. If that yield drops from 5.28% to say 4% over the next 12 months, you would generate a 16.6% return from your 10-year gilt And that could happen if the - 

00:11:01:00 - 00:11:02:00
Jane Parry
Over the ten years you mean?

00:11:02:00 - 00:11:04:00
Tom Hibbert
No, in the next one year.

00:11:04:00 - 00:11:06:00
Jane Parry
Oh, in the next one year? How does that work?

00:11:06:00 - 00:12:29:00
Tom Hibbert
Well, if the yield drops to 4%, you make up the, the bond price goes up. And you generate the current, the yield on the bond. So that could happen if there is a recession. If you own equities as well, obviously equity prices would fall in that scenario. So owning bonds could diversify equity risks. So there are good portfolio construction reasons to own bonds and then the potential downside, o if the yield rises to 7%, which most economic models say that is a full-blown fiscal crisis for the UK, you would only lose 7% on your 10-year gilt over a 12 month horizon. So there's quite good asymmetry, you know, risk reward pay off in owning that gilt. We are cautious on our exposure and wary of the fiscal risks. And we tend to prefer sort of belly of the curve gilts, which is, which is not, we don't go too long dated where all of the fiscal risks get most expressed. And you want, we want more sensitivity to the current cycle and we want a cautious position, to gilts at this stage. And we have built a position over the last 12 months and I think that is still warranted. But we're still cautious on the fiscal trajectory from here and the negative momentum in bond markets.

00:12:29:00 - 00:13:08:00
Jane Parry
Got it. Probably a good time for me to sum up what is in my Canaccord take away coffee cup today. So we talked about the era of free money being over and government borrowing has got more expensive. There's this whole debate about whether governments can deliver growth quickly enough to keep their debt affordable because of the whole impact on inflation. And bond markets are watching very closely. They're no longer below the surface. They're now in the speedboat skippering the ship, a lot of water, and they're increasingly asking to see results rather than promises, I think.

00:13:08:00 - 00:13:09:00
Tom Hibbert
Absolutely.

00:13:09:00 - 00:13:10:00
Jane Parry
Anything else to add?

00:13:10:00 - 00:13:12:00
Tom Hibbert
I think you've nailed it there.

00:13:12:00 - 00:13:39:00
Jane Parry
OK, great. Thank you very much. Thank you for listening to the Canaccord Coffee Break podcast. Hope you've enjoyed it. Hope you've learned a lot about bonds. I certainly have. And inflation. And a few calculations today. Don't forget to hit follow on your preferred podcast channel of choice and you will never miss an episode. And as ever, drop us an email. We love to hear your thoughts, your feedback, your challenges. The email address is coffeebreak@canaccord.com. Thank you.

00:13:39:00 - 00:13:39:00
Tom Hibbert
Thank you everyone.

00:13:40:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:25:00
Luke Farrington
Hello and welcome back. I'm Luke Farrington. I'm filling in for Jane Parry this week who's taking a well-earned break. Some continuity though, is provided by our regular guest, Chief Investment Strategist here at Canaccord Wealth, Tom Hibbert.

00:00:25:00 - 00:00:27:00
Tom Hibbert
Hello, Luke, Good to be on the podcast with you.

00:00:27:00 - 00:01:17:00
Luke Farrington
Thanks for joining. So last week you discussed astronomical U.S. debt levels, $40 trillion and the market jitters over safe haven status of government bonds. We're seeing non-fiat assets like gold and Bitcoin increasing in value and the stories gathered pace this week. Bond yields are still rising, the cost of UK government borrowing is at levels not seen since 2008, and markets are increasingly worried about high interest rates and persistent inflation. At the same time, your weekly markets review highlights another remarkable figure. The world's largest tech companies are expected to spend around 800 billion on AI infrastructure this year. It's spend, spend, spend. But underpinning that, it seems like it's borrow, borrow more and then borrow a bit more. So today we're asking tough questions about how this unprecedented investment is being funded and whether the returns will justify that spending.

00:01:17:00 - 00:01:19:00
Tom Hibbert
Yeah, let's get into it.

00:01:19:00 - 00:01:39:00
Luke Farrington
Cool. So we've seen the impact of the huge expenditure by AI firms building out infrastructure and the positive market ripples from that. And a year ago, it felt like the market was rewarding almost any company linked to AI. But are investors now asking tougher questions? Are they nervous about when they're spending starts generating meaningful returns?

00:01:39:00 - 00:04:04:00
Tom Hibbert
Yeah, that, that's absolutely right. And I think a good way of framing it, although I wouldn't, I probably say less than a year ago companies were rewarding any AI related firm. I would say in the spring, any AI related company was just performing fantastically well. We saw this incredibly strong performance in the spring and then quite suddenly in the summer we've seen quite a bit of weakness come through and there's been a more turbulent period for AI and the AI related trade. And I think, you know, after that period of strong performance, investors have started to scrutinise where the returns are going to come from. I mean the hyperscalers that are building out these data centres for huge amounts of compute commitments from AI companies, that is requiring now increasing amounts of borrowing and debt. And the costs from  those debts are rising, partly because investors are asking for greater compensation from those AI related borrowers, but also because base yields, government yields are also rising at the same time. So that is creating some pressures. And I think there is this realisation that a lot of the AI cycle in this investment cycle really relies on the end user demand for AI companies and two companies specifically, Open AI and Anthropic. And that I think has created a little bit of concern. I would say that the investment cycle is very real. I mean, you've got the biggest companies in the world investing huge amounts of money in building out this AI infrastructure. That money is flowing down to the chip manufacturers in particular, but filtering across the broader economy. And that is benefiting, you know, companies like NVIDIA which have, they're generating a huge amount of cash. I think the other question is about the circularity of some of this financing. So companies like NVIDIA, I've just mentioned, yes, they're getting tons of money, generating vast profits from the huge amounts of capex from the hyperscalers, you know, Amazon and Meta. But they are then using that money to provide financing to the companies at the very sort of top of the chain. So open AI, for example, NVIDIA is financing open AI. Open AI is making these commitments to spend huge amounts of money on compute over the next few years to the hyperscalers and then the hyperscalers are giving the money back to NVIDIA. So NVIDIA is both the customer, indirect customer of Open AI and the borrower to Open AI. And that is creating some tensions within the AI trade as well at the moment.

00:04:04:00 - 00:04:17:00
Luke Farrington
So it seems like a good thing that people are being more sort of studious over this. But what happened? You said it was in the springtime, everything was fine. Did everyone get on their sunbed on the first day of summer holidays and think, oh, we've got too much in NVIDIA? I mean, what happened?

00:04:17:00 - 00:05:12:00
Tom Hibbert
It's a good question. It's sometimes difficult to pinpoint exactly what it is. And I would say that we had a new chair at the Fed, Kevin Warsh, and he hit the scene in June and immediately came out and he made this blunt commitment to delivering price stability, which meant higher interest rates, which means higher borrowing costs. And at the same time as these AI companies were increasingly going to the debt markets to raise financing. That I think triggered this period of scrutiny. It's also quite normal. You know, investors rebalance their portfolios. You had a very strong performance in the spring that meant when they sold down their sort of tech exposure. And it just created an opportunity, I think, for a bit of self-reflection. We've seen this period of greater self-reflection through the summer. We've seen a very good bounce back for tech. We saw tech performed pretty well last week. And we've seen a pretty strong August, but altogether a more turbulent summer for the AI trade.

00:05:12:00 - 00:06:01:00
Luke Farrington
You mentioned Kevin Warsh there, which is a nice segue into policy makers, monetary and fiscal, which we're now going to move on to. We've heard increasingly cautious language from policy makers. Andrew Bailey's warned that the global financial system is becoming more vulnerable to shocks.  Much of that rests on the hyper concentration of tech companies in the US, which we've just spoken about. And that's interesting because central bankers are usually the people trying to reassure the markets rather than worry them. But when you combine huge levels of government borrowing, rising bond yields, persistent inflation, concerns about this unprecedented AI investment, it's not surprising that some commentators are drawing parallels with previous periods of excess and, and warning about looming crash. I know that's not what we talk about. Tom, when you hear comments like that, do you think they're justified or is it simply what happens when money is no longer as cheap as it was?

00:06:01:00 - 00:07:08:00
Tom Hibbert
Yeah. I mean, I think it's difficult to predict a crash. I would say if you look at the underlying economic data, it still looks pretty strong, pretty resilient. And the US I think is really the centre of global growth at the moment, so that we don't have any immediate concerns for an economic slowdown. I think the rise in interest rates is at the long end, particularly, you know, you see 30-year government debt and the yields really rise very sharply. And I think there is a general rise in bond vigilantism. Investors are concerned about the fiscal trajectories of Western economies and there is no appetite from governments to consolidate fiscally and reduce those deficits. And I think that is a bit of a concern. And with regards to Andrew Bailey's warnings that you talk about, I think if there is this fact that we do live in a very financialised world, you know, there's a lot of debt, everything is very financialised, there's a lot of leverage. And I think that generally speaking that does create sensitivity in the underlying economy. So there are some, I think some reasons to some concerns around that. But broadly, the economy seems to be in pretty good health.

00:07:08:00 - 00:07:28:00
Luke Farrington
And, and so I guess what we're really seeing here is it is a period of adjustment to, you know, the fact that money is more expensive and, and I guess it's a slow transition. And essentially what we're seeing is investors in bonds or equities or whatever else, just saying, you know, where's the value in in what we're doing here? And I guess that that's a good thing.

00:07:28:00 - 00:08:38:00
Tom Hibbert
Yeah. And I think the other key point is that there are some really interesting opportunities. If you look at the industrial sector where we quite like, we are seeing corporate order books look very strong because of this, the underlying strength I think of the economy, there are some really interesting opportunities to capture there. And then where we do see real diversification, it's not necessarily in the bond market, which you know, I think will diversify under certain scenarios. It's within defensive equity sectors. So the healthcare sector now has a negative correlation to AI stocks and trades very cheaply to the broader market and provides a great ballast to that within equities. So I think there are opportunities to be had in more cyclical sectors. The flow of money down through the AI supply chain is very real. Maybe there are some opportunities there. I think a lot of that has happened through the spring as I've said, but still AI has this fantastic potential to produce gains and productivity enhancement for the economy. So we're not discounting that, the industrial sector looks, looks attractive and you can provide some ballast through defensive and cheap exposure through sectors like healthcare.

00:08:38:00 - 00:08:42:00
Luke Farrington
And I'm going to provoke you here. Anything in the non-fiat assets?

00:08:42:00 - 00:09:11:00
Tom Hibbert
Yeah. I mean, yeah, I think gold, I've spoken a lot about  how gold is now quite expensive. It's had a period of very strong performance. But ultimately, given the ongoing fiscal imprudence of the US and other Western economies, gold is an important part of client portfolios and does provide protection against currency debasement. And that's a risk which I think is still present. And we're certainly seeing that priced into to bond markets at the moment. And I think I spoke about that on the podcast last week as well.

00:09:11:00 - 00:09:20:00
Luke Farrington
You did. As always Tom, a calm and reassuring voice cutting through the noise and also presenting some really interesting opportunities there. So thank you very much for joining us.

00:09:20:00 - 00:09:22:00
Tom Hibbert
Thank you very much.

00:09:22:00 - 00:09:25:00
Luke Farrington
And thank you for listening and we'll see you next time.

00:09:25:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal entity. It is accurate at the time of recording and is subject to change.

00:00:10:10 - 00:00:22:00
Jane Parry
Good morning, and welcome to the Canaccord Coffee break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And this week I am delighted to be joined by Tom Hibbert from our Chief Investment Office. 

00:00:22:00 - 00:00:23:00
Tom Hibbert
Hello. 

00:00:23:00 - 00:01:11:00
Jane Parry
Morning, morning.  As you know, each week on the podcast, we try to cut through the noise, demystify what's happening in the markets and help you feel more informed, confident and in control of your financial future. So, this week, we are trying to demystify what's happening in the bond markets. In particular the US bond markets. We are looking at basically the supply and demand of capital, globally, across the markets and the fact that everybody seems to want your money at the same time. So, governments need it, companies need it, the AI revolution needs it. And this all has implications for the cost of money, which seems to be rising, which we'll come back to, for policymakers and for governments who are becoming increasingly uncomfortable about the cost of debt and the interest burden they’re bearing.

00:01:11:00 - 00:01:29:00
Tom Hibbert
Really, we're going to talk about the rising cost of government debt, bond yields over the long term. This is long-dated bond yields. So we're seeing bond yields rise particularly over sort of ten years plus, 30 years. And bond yields have risen very sharply.

00:01:29:00 - 00:01:37:00
Jane Parry
Okay. Let's grab your long Americano then as we talk about long dated bond yields.

00:01:37:00 - 00:01:37:00
Tom Hibbert
Yes let’s do it.

00:01:37:00 - 00:01:42:00
Jane Parry
Let's do it. Right. So the cost of money is largely set by the bond market.

00:01:42:00 - 00:01:43:00
Tom Hibbert
Absolutely.

00:01:43:00 - 00:01:48:00
Jane Parry
And investors are increasingly demanding a higher return before they'll part with their money.

00:01:48:00 - 00:01:51:00 
Tom Hibbert
Which means bond price is lower, bond yields higher.

00:01:51:00 - 00:01:54:00
Jane Parry
Got it. So what are the bond market headlines then this week?

00:01:54:00 - 00:02:02:00
Tom Hibbert
Yeah. And just to say I mean the cost of money obviously has implications for everything for global financial markets. And that is set by the bond market.

00:02:02:00 - 00:02:04:00
Jane Parry
So that's what we're paying on our mortgages as well as the bond market.

00:02:05:00 - 00:02:55:00
Tom Hibbert
Precisely that. And 30-year yields. So, if you want to lend money to the US government over 30 years, your yields are rising. The yields that investors are demanding on that debt is rising. And that is creating some macro pressure in the background. And it's also led to some intervention from US authorities in the market to try and alleviate that upward pressure on bonds. I think the key point is that given how much the US government is spending, they're running a very significant budget deficit. There are some increasing concerns about the fiscal credibility of the US, and those tend to be expressed over longer periods of debt. So if you want to if you're lending money for the long term, you're worried about fiscal credibility as well as other things. There are other inputs as well, inflation and things like that. But for over the long term, that's really where fiscal concerns are expressed.

00:02:55:00 - 00:03:02:00
Jane Parry
Okay. So, they're worrying about the cost of debt going up and the government having to pay more money on that.

00:03:02:00 - 00:03:14:00
Tom Hibbert
And to put that into perspective. The 30-year US Treasury yield climbed to its highest level since before the global financial crisis. Up at 5.3%. That really starts to rise.

00:03:14:00 - 00:03:26:00
Jane Parry
What since 2007?  Wow. So you mentioned the US government intervening in the bond markets to try and stem this rising yield. So what's happening there?

00:03:26:00 - 00:03:50:00
Tom Hibbert
So Scott Bessent, the US Treasury secretary, is obviously responsible for issuing a lot of the debt and managing the US finances effectively. He said at the end of last year. So in November 2025, he said, my job is to be the nation's top bond salesman, and Treasury yields are a strong barometer for measuring success in this endeavour. 

00:03:50:00 - 00:03:52:00
Jane Parry
I really think we should have done that in American accent but never mind.

00:03:53:00 - 00:04:30:00
Tom Hibbert
Yeah, I can't do accents, but the point is, you know, he sees his barometer of success, those borrowing costs, particularly long-term borrowing costs. He's intervened in the market. So at the same day as the US government's total debt surpassed $40 trillion, the Treasury Under Secretary Scott Bessent intervened in the bond market by increasing their buybacks of more illiquid, longer dated bonds, and the size of the intervention wasn't really that significant, less about the size, but more about the signal that it sends to the broader market.

00:04:31:00 - 00:05:05:00
Tom Hibbert
Until now, long-term US interest rates, bond yields, have been allowed to rise along with the sort of free market. And the message now is that, yes, long term yields can rise, but not indefinitely. And now it's getting to a bit of a pain point for the US government. They're trying to stem that upward pressure on bond yields. And the issue is obviously for the US government that if their borrowing costs go up too much, the cost of servicing that debt becomes an increasingly significant burden for the US government.

00:05:05:00 - 00:05:14:00
Jane Parry
But for investors, though, if they're constraining the potential upside of the yield, does that mean there are fewer investors in bonds? Is that where we're going now?

00:05:14:00 - 00:05:33:00
Tom Hibbert
Yes, over the long term. Over the long term if bond prices are higher, yields are lower, particularly if inflation is higher. The real returns, the return that you achieve above whatever inflation is, is eroded. So, it makes US treasuries quite unattractive on a real yield basis.

00:05:33:00 - 00:05:36:00
Jane Parry
And I suppose when you're comparing that investment.

00:05:36:00 - 00:05:37:00
Tom Hibbert
Globally to -

00:05:37:00 - 00:05:50:00
Jane Parry
Globally to equities or to other asset classes, and as we've said right at the beginning, this is a supply and demand thing. If you've got money, you can choose where you're going to deploy that and invest it to get the best return.

00:05:50:00 - 00:05:55:00
Tom Hibbert
That's exactly right. So if long term yields are prevented from rising sufficiently -

00:05:55:00 - 00:05:56:00
Jane Parry
Why would you take -

00:05:56:00 - 00:06:06:00
Tom Hibbert
To reflect the fiscal risks, to reflect the compensation for inflation risks, then investors are going to be encouraged to reduce their holdings of those assets.

00:06:06:00 - 00:06:09:00
Jane Parry
Okay. So, if that's the case where does this - 

00:06:09:00 - 00:06:10:00
Tom Hibbert
Where's the pressure.

00:06:10:00 - 00:06:11:00
Jane Parry
Yeah, where’s the pressure?

00:06:11:00 - 00:06:24:00
Tom Hibbert
Yeah that's right. And I think the likely loser is the US dollar. So a lot of buyers, the US bond market is attractive. You can generate quite an attractive yield which is set by the free market if that yield is too low -

00:06:24:00 - 00:06:25:00
Jane Parry
Or artificially constructed 

00:06:25:00 - 00:06:39:00
Tom Hibbert
Artificially low, buyers are less inclined to buy those bonds, particularly international buyers. And therefore it reduces the demand for US dollar assets. And the US dollar can trade quite softly.

00:06:39:00 - 00:06:41:00
Jane Parry
Okay, so the US dollar - 

00:06:41:00 - 00:06:42:00
Tom Hibbert
So it has a -

00:06:42:00 - 00:06:42:00
Jane Parry
Rate would weaken

00:06:42:00 - 00:07:04:00
Tom Hibbert
US dollar could weaken. And we've already seen this reflected in other stores of value. Non fiat stores of value. So it benefits things like gold. Which is obviously a monetary metal. And gold is performing very well on the back of this new policy. Gold’s up to 15% in August. Bitcoin is another example. It's up 27%. It's done very well in August. So it's really recovering after a period of significant weakness. And it also supports emerging markets. Emerging markets sovereign debt and emerging market debt will also be supported. Emerging markets issue their debt in US dollar terms. So if that, the value of those US dollar assets declines, it's easier for those countries to pay off their US dollar denominated debt in their own currencies.

00:07:29:00 - 00:07:34:00
Jane Parry
Yeah okay. Interesting times. Okay. So anything investors should be thinking about and take away from this?

00:07:34:00 - 00:08:08:00
Tom Hibbert
Yeah I think it's more, I think that's more or less covered. It's just an interesting dynamic. Now that Scott Bessent and the US Treasury are increasing their activity in the bond market, this has major global implications, not just for bond investors, but much broader than that, for the cost of capital, for companies, for consumers. And it also has major implications for global capital flows, which potentially, if this activity is expanded further and yield curve control becomes a broader policy, we could see a weaker US dollar over the medium to long term.

00:08:08:00 - 00:08:13:00
Jane Parry
And last week was the first signal of them doing that, which is why it's so important I guess.

00:08:13:00 - 00:08:19:00
Tom Hibbert
Absolutely. And we've seen some major moves already in markets, particularly in the gold price, Bitcoin, things like that.

00:08:19:00 - 00:09:11:00
Jane Parry
Thank you. Well, let's have a look at what’s in my long-term Canaccord takeaway coffee cup. So we said both bond investors, or vigilantes as they're known, are increasingly demanding a higher return to lend money to governments., in this case particularly the US government, because of long term fiscal pressures, but also persistent inflation in the shorter term. The challenge is that governments can ill afford this ever-rising cost of borrowing. And if policymakers continue to try to limit long-term yields, that adjustment may be felt elsewhere, most particularly in the US dollar, potentially becoming weaker, which has ramifications across the whole global markets. So this is not really just a story about today's bond market or interest rates, but about the potential far-reaching implications for currencies for gold, Bitcoin, and really for capital flows globally.

00:09:11:00 - 00:09:12:00
Tom Hibbert
That's exactly right.

00:09:12:00 - 00:09:36:00
Jane Parry
Yeah. Thank you very much. And thank you for helping us understand all that. Thanks for listening to the Canaccord Coffee Break podcast today. Hope you've enjoyed it. I hope you've learned a little bit about bond markets. Don't forget to hit follow on your preferred podcast channel of choice and you will never miss an episode. And as always, we'd love to hear your thoughts. Ask questions. Challenge us. Drop us an email coffeebreak@canaccord.com. Thank you.

00:09:36:00 - 00:09:38:00
Tom Hibbert
Thank you for listening.

00:09:38:00 - 00:10:03:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:32:00
Jane Parry
Good morning and welcome to the Canaccord Coffee break. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I'm delighted to be joined by new guest today, Guy Thornewill, who is our Direct Equities Director from our Chief Investment Office. Guy has been at Canaccord for six weeks now. 

00:00:32:00 - 00:00:33:00
Guy Thornewill
That's right. 

00:00:33:00 - 00:00:34:00
Jane Parry
Welcome, welcome. 

00:00:34:00 - 00:00:34:00
Guy Thornewill
Thank you. 

00:00:34:00 - 00:00:46:00
Jane Parry
Your first time on the podcast. Just before we go into a bit more detail, there is a tradition here that we ask you what is your coffee or hot beverage of choice?

00:00:46:00 - 00:00:49:00
Guy Thornewill
Well, I'm afraid I'm not actually a coffee drinker. 

00:00:49:00 - 00:00:52:00
Jane Parry
Oh my God, we might not be able to let you on.

00:00:52:00 - 00:00:55:00
Guy Thornewill
Yeah. Typically, it's a juice in the morning or water.

00:00:55:00 - 00:00:57:00
Jane Parry
So, no caffeine. You're doing this without caffeine today?

00:00:57:00 - 00:01:00:00
Guy Thornewill
I do drink a can of Coke in the afternoon. That's my caffeine fix.

00:01:00:00 - 00:01:09:00
Jane Parry
Okay, we'll take that, then. Welcome aboard. So just so our listeners know, just give us a little bit of background. How long have you been looking after direct equities and what does that involve?

00:01:09:00 - 00:01:13:00
Guy Thornewill
Well, I've been in equity research for close to 30 years now.

00:01:13:00 - 00:01:15:00
Jane Parry
And what does that involve, researching equities?

00:01:15:00 - 00:01:21:00
Guy Thornewill
Researching listed companies, and trying to make good decisions for clients on which companies to invest in.

00:01:21:00 - 00:01:48:00
Jane Parry
Brilliant. Thank you. So, as you know, each week on our podcast, we try to cut through all the noise, demystify what's happening in the markets. And quite often we're looking at the equity markets, and then hopefully help our clients feel more informed, more confident and more in control of their financial future. So, this week, I wanted to chat through what seemed to be two fairly contradictory messages. The first is we're in reporting earnings season and companies seem to be making more than expected, particularly in the US. And second, that consumers are spending less than expected, which is all very confusing for somebody like me. So, I just wanted to understand that a little bit more. So, grab your juice then. I can't say grab your coffee this morning. Grab your coffee, I normally say, and let's dive on in. So first off, this week's headline was pretty remarkable, I think, with 85% of US companies beating earnings expectations. So, do you think you can just give us a few more details on that?

00:01:48:00 - 00:02:45:00
Guy Thornewill
Yeah, exactly. It definitely has been a very strong earnings reporting season, especially in the US as you mentioned, but also in Europe, which we can get to. So, the vast majority of the second quarter earnings reports are now in, as you mentioned, 85% of companies have actually beaten estimates in Europe. The figures are a bit lower, 63% have beaten estimates. But that's still above historical averages both in the US and in Europe. So that now means that US second quarter earnings growth is going to be about 25% year-over-year. And that's excluding some one-off big equity investment gains for large cap tech.

00:02:45:00 - 00:03:00:00
Jane Parry
Very healthy.

00:03:00:00 - 00:03:21:00
Guy Thornewill
But that's a really healthy number. Exactly. So now we're seeing earnings growth for 26 expected to be about 30 to 35% in the US and around 10 to 15% in Europe. So very strong numbers. And as we like to say in the long-term equity prices tend to follow earnings. So, it's actually been a positive week for markets last week, with the US and Europe both reaching new highs.

00:03:21:00 - 00:03:22:00
Jane Parry
So good for investors.

00:03:23:00 - 00:03:23:00
Guy Thornewill
Very good.

00:03:24:00 - 00:03:28:00
Jane Parry
Great. So why are they surprising on the upside then? And what's driving this growth?

00:03:28:00 - 00:03:34:00
Guy Thornewill
Well, I think it's good to look at it from a sector point of view. So, in the US it is still the technology sector that's driving a lot of that.

00:03:34:00 - 00:03:37:00
Jane Parry
Yeah, we've talked about that a lot on the podcast. 

00:03:37:00 - 00:03:38:00
Guy Thornewill
Yes, yes.

00:03:38:00 - 00:03:39:00
Jane Parry
I'm sure you can imagine.

00:03:39:00 - 00:04:27:00
Guy Thornewill
Yes. I've listened to a few of the recent ones and the demand for AI compute and investments in infrastructure, that's still really strong. So it has eased some of the fears about over investment. But that's still a live debate. Another sector that's done really well is the energy sector. Now that's clearly driven by high oil prices. Those are obviously much higher year over year than they were a year ago due to the Iran war. So that's been driving earnings as well. And then another important sector, the industrial sector, that's actually seen really good earnings growth and a strong recovery in orders. So, in industrials in the US actually there's been lower growth rates and some destocking running down inventories over the last few years. But that's now ending. And the US companies are starting to enjoy a cyclical upswing. And economic growth is really broadening out. So that's really helping as well.

00:04:27:00 - 00:04:31:00
Jane Parry
Great. And what about Europe. Similar sort of situation? Similar sectors?

00:04:31:00 - 00:04:44:00
Guy Thornewill
Similar in some ways, the energy has been very strong in Europe. Good earnings growth. That's been the strongest growth year-over-year. Technology has been good too but less so than the US. It's a much lower weight in the market compared to the US.

00:04:44:00 - 00:05:06:00
Jane Parry
Interesting, then, okay so broader economic growth seems to be supporting companies’ earnings. And as we've said before on the podcast, it seems like some other sectors are now sort of coming up to meet the Magnificent Seven and those tech AI stocks. So, if companies are doing so well, why are we also seeing retail sales falling and the consumer being more cautious really? What's happening?

00:05:07:00 - 00:05:27:00
Guy Thornewill
Yeah. Well, you're right, Jane, to mention that retail sales numbers in the US were quite disappointing, and that's at the end of last week. They fell 0.6% month-on-month compared to an estimate of just being slightly positive. So even if we take out the more volatile effects of auto sales and energy sales, it was actually the worst reading for retail sales for a whole year.

00:05:27:00 - 00:05:27:00
Jane Parry
Okay.

00:05:28:00 - 00:05:30:00
Guy Thornewill
I think part of this is about the K shaped economy.

00:05:30:00 - 00:05:31:00
Jane Parry
The K shaped economy.

00:05:31:00 - 00:05:50:00
Guy Thornewill
Yes. So, what I mean by that is, if the sort of bit that's sloping upwards of the K, that's the high-income sector, that's still doing quite well. High end consumers who earn good money doing well. Stock markets are high so they're doing okay. But at the low end, that's the downward shaping part of the K, low-income demographic in the US., they're actually really struggling. And we're starting to see that in the weaker retail sales as well. If we put the number in context though, on a year-over-year basis, so not month-over-month, retail sales are still up 5% in the UK. So, it's still okay.

00:06:05:00 - 00:06:06:00
Jane Parry
So not all doom and gloom.

00:06:06:00 - 00:06:12:00
Guy Thornewill
Not all doom and gloom, but it's an important part of the economy and any continued weakness would be a bit of a concern for growth.

00:06:12:00 - 00:06:14:00
Jane Parry
And similar in the UK and Europe?

00:06:14:00 - 00:06:47:00
Guy Thornewill
Yeah, well the consumer in the UK and Europe has been struggling for a while with the cost-of-living crisis. I think we all know about that, having to cope with really persistent inflation and also high energy and food prices, and actually talking about earnings for companies. This has been reflected a bit in earnings for consumer related companies in Europe and the UK. We've actually seen quite a few downgrades there. And then furthermore, in the UK we've had tax rises in the UK over the last year or so and that really hasn't helped employment growth either. So, let's see what new Prime Minister Andy Burnham does about that.

00:06:47:00- 00:06:59:20
Jane Parry
So, against the backdrop then of such great company earnings, why does this consumer weakness matter? And kind of is that a red flag or a yellow flag? What should we be thinking about as investors?

00:06:59:21 - 00:07:19:13
Guy Thornewill
Well, it is really important because as we said, corporate earnings are doing pretty well in lots of different sectors. But in 2025, in the US, personal consumption expenditure was actually 68% of US GDP. So, it's about two thirds of the economy. So, it is important. Obviously one week, month doesn't make a trend and retail sales are still growing year on year, 5%, as we mentioned, labour markets in the US are still quite healthy. And in Europe it's okay. So, I think for now, probably a yellow flag rather than a red flag. Although if this weakness does persist, it could feed through into company revenues and earnings.

00:07:32:19 - 00:07:46:07
Jane Parry
Yeah. So it sounds like consumer spending is slowing primarily as a result of the sort of persistent inflationary pressures wherever they're coming from. So, what is the situation with inflation and the outlook there?

00:07:46:11 - 00:07:53:20
Guy Thornewill
Well, on the positive side, US inflation figures were pretty encouraging. The CPI last week rose just 2.5%.

00:07:53:22 - 00:07:55:09
Jane Parry
That's the consumer price index.

00:07:55:14 - 00:08:10:01
Guy Thornewill
The consumer price index. Yes. That was in line with expectations, actually the slowest increase since March 2021. And so if inflation is stable and the consumers are a bit weaker, then there's a lower chance of the Federal Reserve raising interest rates. So that's kind of a positive.

00:08:10:03 - 00:08:11:06
Jane Parry
Similar in the UK?

00:08:11:07 - 00:08:17:05
Guy Thornewill
Inflation has moderated a bit from the peak levels indeed. So 2, 2.5% we're looking at. So, we're going to get more data soon.

00:08:17:06 - 00:08:19:02
Jane Parry
Okay. So very similar then to the US.

00:08:19:03 - 00:08:23:04
Guy Thornewill
Pretty similar. But energy and food are important parts of household budgets. 

00:08:23:05 - 00:08:47:15
Jane Parry
Yeah, I wanted to touch on actually food and energy just listening to the radio this morning on the way in. And we've been talking about such a hot summer, making it so difficult for farmers and for agricultural production. You kind of got to think that's going to restrict supply and therefore push food prices up further. And then we've also talked in the past about rising energy prices due to the war in Iran. You know, I just saw last week my direct debit for my gas and electricity has gone through the roof now the price caps been removed. So again, those sort of non-discretionary spend pressures will put presumably pressures on other parts of the economy and therefore company earnings.

00:09:03:19 - 00:09:23:10
Guy Thornewill
Yeah. Well, it's definitely something we need to watch closely. Obviously, we've had record breaking heat waves across the continent, the Rhine River in Germany. That's really important for transporting goods. That's at record low levels. It's a threat to supply chain. So, this all does have implications for agricultural production. If we have lower yields that could impact supply of crops and it could lead to higher food prices. So, it's a risk that central banks will watch closely given potential implications for inflation.

00:09:28:08 - 00:09:34:04
Jane Parry
Yeah. I guess climate and weather could now become an economic issue rather than simply an environmental issue.

00:09:34:05 - 00:09:35:17
Guy Thornewill
It could do. It could do indeed.

00:09:35:19 - 00:09:52:11
Jane Parry
Yeah. Worth keeping an eye out for it. So this brings us back. What does it all mean, just summing up the last week or so, for our clients and for investors? You know, do markets just care about growth or is it all about growth relative to inflation and the potential trajectory for interest rates?

00:09:52:12 - 00:10:13:06
Guy Thornewill
Well, markets really love growth with low rates and low inflation. But you can't always have that. So right now, we've got strong earnings that's supportive to softer inflation that is supportive to interest rate expectations, fairly neutral at this point in terms of short-term rates. And then we're watching consumer weakness carefully as that could impact growth. So the outlook is still pretty decent.

00:10:13:07 - 00:10:14:04
Jane Parry
Pretty supportive.

00:10:14:05 - 00:10:14:17
Guy Thornewill
Yes.

00:10:14:18 - 00:10:43:06
Jane Parry
Brilliant. Thank you so much. Thank you for your time today. At this point, it's probably good for me to sum up what's in my Canaccord takeaway coffee cup or my Diet Coke tin. So, I'm reminded again that markets ultimately follow earnings and company earnings continue to surprise on the upside, which is helping markets reach new highs. But consumers are becoming more cautious as some of the inflationary pressures bite. And therefore, spending remains a key indicator for us to watch out for in the months ahead. Anything to add to that?

00:10:51:05 - 00:10:52:16
Guy Thornewill
No. Good summary. Thanks, Jane.

00:10:52:17 - 00:11:11:05
Jane Parry
Thank you very much and thank you for listening to the podcast and we hope you've enjoyed it. Don't forget to hit follow on your preferred podcast channel of choice and you will never miss an episode. And as always, we'd love to hear your thoughts. Drop us a line. The email address is coffeebreak@canaccord.com Many thanks.

00:11:11:11 - 00:11:33:03
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for this specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:25:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And this week, I'm delighted to be joined by special guest star John Pullar-Strecker from our Chief Investment Office. 

00:00:25:00 - 00:00:26:00
John Pullar-Strecker
Morning, Jane

00:00:26:00 - 00:00:29:00
Jane Parry
Morning. Welcome. Haven't seen you on the podcast for a while. Nice to have you back.

00:00:29:00 - 00:00:31:00
John Pullar-Strecker
It's been a little while. So great to be back.

00:00:31:00 - 00:01:22:00
Jane Parry
Good. So, as you know, each week on the podcast, we try to cut through the noise, demystify what's happening in the markets, and then hopefully help our listeners feel more informed, confident and in control of their financial future. So, this week, John, my big question is all about the UK stock market, for a change of scene. And it seems that overseas investors are rushing in to buy Britain. So the British stock market looks relatively cheap. But also, why are they rushing into buy Britain and why are British investors still rather hesitant? So, I would like to get into that. All because takeover activity seems to be running at record levels with foreign buyers, particularly private equity firms, seeming to be spotting something in the UK that UK investors have missed.

00:01:22:00 - 00:01:37:00
John Pullar-Strecker
Yeah, absolutely. Yes. Well thanks, Jane, and thanks for the introduction. Yes, it's been a very busy year so far for UK bids. Many of those bids haven't completed yet, so we don't know whether they're going to force bids.

00:01:37:00 - 00:01:40:00
Jane Parry
By bids you mean international buyers bidding on UK - 

00:01:41:00 - 00:02:38:00
John Pullar-Strecker
International buyers in particular, I mean there are some cases where about 40% are UK buyers, but almost 50% of the purchases that have been agreed so far, or at least put on the table, have come from overseas, in particular from the US markets, particularly strong interest from the US. You're right, notably from private equity. And I think the reason - and it's across a spectrum of large caps and medium caps - the UK market is relatively cheap. It's always been a little bit more cyclical than some other areas. And the hope is that with interest rates coming down at some point, that these companies are providing bargains. Great dividend yields in the UK, good cash flow, cheaper than the US and other international markets. So, it's become a really good hunting ground.

00:02:38:00 - 00:02:44:00
Jane Parry
So if Britain is so cheap, why has it stayed cheap for so long?

00:02:44:00 - 00:03:17:00
John Pullar-Strecker
I think the markets - it's a really good question. The global markets have kind of split into cheaper markets. Europe is a little bit more expensive than the UK but not much more. Emerging markets which are rerated over time, particularly as AI technologies come through. And then we have the US that's led by the Microsofts, Alphabets, etc. and those and the US market is trading at a premium because growth from the US has been stronger.

00:03:18:00 - 00:03:31:00
Jane Parry
In terms of the PE ratings and the forecast earnings, as we've talked about in the past, how does the UK stock market on average compare with, say, more expensive, similar businesses in the States?

00:03:31:00 - 00:03:48:00
John Pullar-Strecker
So on average, the UK market trades somewhere between say ten and 12 times, in terms of price to earnings, the US market is at least 20 times, possibly in the low 20s on a given day.

00:03:48:00 - 00:03:51:00
Jane Parry
So no wonder some of these American equity investors think we're cheap then.

00:03:51:00 - 00:04:12:00
John Pullar-Strecker
Yes I mean that's true. There is a slight disparity in that high-quality UK companies that are less cyclical do trade on higher multiples. So there's more, more of a variance I would say in the UK than there is in the US. But you're right. I mean on average it's a cheaper it's a cheaper market, a good hunting ground. 

00:04:13:00 - 00:04:22:00
Jane Parry
Yeah. So what is it particularly about the UK, the British stock market, that makes it so cheap then, relative to those other markets?

00:04:22:00 - 00:04:47:00
John Pullar-Strecker
I think it's a more cyclical market than others. So it has a greater proportion of the banks or stocks which are more cyclical in terms of the world and economic cycles. But I think also the particular interest, because the UK is relatively open for, for takeovers. So we don't have much protection for UK companies.

00:04:47:00 - 00:05:16:00
Jane Parry
So you talked about large caps but also mid and smaller caps. And I think last week the UK mid and small cap stocks outperformed, I think in the weekly markets review we were saying they gained 2.4% while large caps rose 0.5%. But seemingly off the back of some of this M&A activity. So why is that? Why is there such volume in M&A activity at the moment?

00:05:16:00 - 00:06:18:00
John Pullar-Strecker
Yeah, I think the performance is partly down to results. Some good results in UK mid-caps in particular, but I think it's just the ease of access, and EasyJet which is in the process of being bid for from the US, it’s a company which has been I suppose open for takeover over a long period. There's a lot of consolidation going on in the airline business and the opportunistic side is that these private equity firms have lots of capital. They're ready to deploy them. They don't see perhaps as much value domestically, particularly the US ones, in the US. So they're looking to invest and buy overseas. And it's easier to bid for companies in the UK than it is in many European countries. So yeah, it's been great for the UK markets because the UK market has performed pretty well.

00:06:18:00 - 00:06:41:00
Jane Parry
You've also mentioned broadly positive domestic earnings. So, it sounds like the UK is in better shape than the cheap stock market. And all of the headlines and the noise and multiple prime ministers and Brexit and all of that. It sounds like actually the backdrop underneath those sort of news headlines is a bit more positive. What’s your view there?

00:06:41:00 - 00:07:15:00
John Pullar-Strecker
It's a great point. The UK stock market always seems to do better, be doing better than the UK economy. And I think part of that is that the majority of Footsie 100, 250 companies earn the majority of their earnings from outside the UK. So they're benefiting from higher global growth rates externally. But it's also that we have some great companies that execute really well. And many of those are the ones that get bored.

00:07:16:00 - 00:07:33:00
Jane Parry
Yeah. Maybe they do. Right. Interesting. So, probably time for me to sum up what's in my Canaccord takeaway coffee cup. So even though Britain's reputation may be stuck in the bargain basement, overseas buyers appear convinced that there is actually hidden value on the shelves.

00:07:33:00 - 00:08:06:00 
John Pullar-Strecker
Yes, I think the companies, particularly American companies, appreciate the quality of UK management teams and businesses and also appreciate the ease in which many of those transactions can take place, and the combination of factors - having less hassle, but also buying great businesses - is attractive. And if you have –

00:08:06:00 - 00:08:07:00
Jane Parry
And relatively cheap.

00:08:07:00 - 00:08:14:00
John Pullar-Strecker
Yes, and relatively cheap. So offering better returns than are perhaps available back home.

00:08:14:00 - 00:08:53:00
Jane Parry
So back to my coffee cup. Looks like takeover activity is booming, but for solid reasons, as you've said. So partly the price of the shares, partly good management teams, partly just nicely, well-run businesses. Earnings are holding up. The economy perhaps looks more resilient than many expected. And the main point, maybe is just that we're perhaps just a little bit more pessimistic about our prospects than overseas buyers are. Equity firms, international buyers certainly seem to be voting with their check books. I wonder whether it's a matter of how long the public market investors will take to eventually reach the same conclusion, then.

00:08:53:00 - 00:09:09:00
John Pullar-Strecker
It's a great question. And I think the other factor, everything you said is absolutely spot on. Adding to that, the fact that private equity companies like Apollo, Blackstone, KKR have abundant access to relatively cheap capital. 

00:09:10:00 - 00:09:12:00
Jane Parry
And they need to deploy it and invest it in something.

00:09:12:00 - 00:09:39:00
John Pullar-Strecker
You've got a check book with lots of checks that you can write. Then all you need is the right companies to invest in. I don't see the rates of companies being bid for. I just don't see that changing. I don't see something in a decrease unless there's a major global economic shock, which suddenly means the capital withdraws. So I think there's more to come.

00:09:39:00 - 00:10:01:00
Jane Parry
Okay. Thank you very much. Thank you for your time today. And thank you for listening to the Canaccord Coffee Break podcast. I hope you've enjoyed it. And as ever, don't forget to hit follow on your preferred podcast channel of choice and you will never miss an episode again. We'd always love to hear your thoughts. Do drop us an email. The email address is coffeebreak@canaccord.com Thank you.

00:10:01:00 - 00:10:02:00
John Pullar-Strecker
Thanks, Jane.

00:10:02:00 - 00:10:24:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for this Pacific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:26:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I am delighted to welcome back Tom Hibbert from our Chief Investment Office, back from his holidays in Scotland, camping.

00:00:26:00 - 00:00:27:00
Tom Hibbert
I am. It's good to be back.

00:00:27:00 - 00:00:28:00
Jane Parry
I know.

00:00:28:00 - 00:00:31:00
Tom Hibbert
It was great fun in Scotland, camping, a bit rainy.

00:00:31:00 - 00:00:32:00
Jane Parry
Bit rainy.

00:00:32:00 - 00:00:35:00
Tom Hibbert
The last three days were just straight rain.

00:00:35:00 - 00:00:41:00
Jane Parry
If I tell you we had 30 degrees down here, you’ll be pleased to know that, won’t you? And the midges?

00:00:41:00 - 00:00:44:00
Tom Hibbert
Quite nasty, but we were fairly well prepared for that.

00:00:44:00 - 00:00:45:00
Jane Parry
And how was the coffee?

00:00:46:00 - 00:00:48:00
Tom Hibbert
Good. You know, I had a percolator.

00:00:48:00 - 00:00:50:00
Jane Parry
You had a percolator in a tent?

00:00:50:00 - 00:00:51:00
Tom Hibbert
Yes.

00:00:51:00 - 00:00:53:00
Jane Parry
That’s a very posh way to camp. That’s all I can say.

00:00:53:00 - 00:01:00:00
Tom Hibbert
I think particularly when you're camping, I like rocket fuel coffee in the morning. So, yeah. Percolator.

00:01:00:00 - 00:01:02:00
Jane Parry
Welcome back. I hope you're all rested.

00:01:02:00 - 00:01:03:00
Tom Hibbert
It’s good to be back. I am rested.

00:01:03:00 - 00:01:29:00
Jane Parry
Here we go. This week's Coffee Break podcast. As you know, trying to cut through all the noise, demystify what's happening in the markets and then help our listeners feel more informed, confident and in control of their financial future. So, this week, I would like to talk about what surprised me in the markets. So, the US stock market looks like it's gone nowhere in the last couple of months.

00:01:29:00 - 00:01:32:00
Tom Hibbert
Yeah, it's down 1.2% from the end of May.

00:01:33:00 - 00:01:41:00
Jane Parry
But 60% of the companies that make up the US stock market actually saw their share price rise in that period of time.

00:01:41:00 - 00:01:41:00
Tom Hibbert
Yes.

00:01:41:00 - 00:01:51:00
Jane Parry
So, a bit of a mystery to unpick. And I wanted to understand what was going on underneath the bonnet or because you've been camping, perhaps it's underneath the canvas, whilst you've been away.

00:01:51:00 - 00:01:53:00
Tom Hibbert
I was camping in a Land Rover Defender. 

00:01:54:00 - 00:02:09:00
Jane Parry
Oh, here we go. Yeah. No canvas. All right. Yeah. So he was underneath the bonnet then. So what does this mean? What's happening? So, let's grab your percolator and let's dive on in. Could you just, first off, give us just a quick summary of what's happening.

00:02:09:00 - 00:02:39:00
Tom Hibbert
Yeah, absolutely. So, we had a very strong rally driven by the technology sector in particular through the spring and in June and July we're seeing some quite material weakness. So, we're calling it the summer semiconductor swoon. It started off as the June swoon, but it's continued into July. So, we're seeing some tech weakness overall. And just to focus on the US because it's you know, it's the best, clearest example of that.

00:02:39:00 - 00:03:02:00
Tom Hibbert
But we're seeing the same pattern across the global market. You know the US has delivered a return of -1% since the end of May. Underneath the bonnet though, most companies are performing really quite well. 60% of stocks, over 60% of stocks have delivered positive returns. But the weakness is concentrated within tech. That is, the tech sector is falling 6%, communication services, so quite a lot of that is tech related, has actually lost close to 8%. The semiconductor industry stocks have declined 10%. So that's a component of the tech sector. So, weakness there which is driving the whole market on an index level down because it’s such a big component of the index. And there's quite a lot of weakness there. Whereas the broader market is actually performing very well. And there are a couple of reasons for that. One is that there is, despite still strong earnings and strong economic activity, that we're seeing, there is greater scrutiny over the AI build out spend and investments that we're seeing there, across the whole pyramid. And the reason for strength across the broader market is that the actual economic backdrop, and the corporate landscape, is still very positive. So, it's really a positive story that we're seeing a broadening out of market.

00:03:56:00 - 00:04:07:00
Jane Parry
Broadening out. So broadening out of market leadership means other people are rising up. So we're not so dependent on the Mag 7 or the technology stocks.

00:04:07:00 - 00:04:09:00
Tom Hibbert
Exactly. That's right.

00:04:09:00 - 00:04:19:00
Jane Parry
So just go into the ones that are coming up to take up some of that slack. What sort of sectors, companies, industries are we talking about there?

00:04:19:00 - 00:04:26:00
Tom Hibbert
I'd highlight two because it's coming from two areas where it's very broad, coming from the whole market basically.

00:04:26:00 - 00:04:26:00
Jane Parry
But we’ve only got ten minutes.

00:04:26:00 - 00:04:53:00
Tom Hibbert
I'd frame it in two ways. The first is, we are seeing a bit of an actually cyclical upturn in the global economy at the moment, we're seeing global manufacturing activity still firmly in expansionary territory. Services activity is also in expansionary territory, that has been for a long time, seeing an upsurge in manufacturing. And that is supportive of some of the more cyclical areas of the equity markets, 

00:04:53:00 - 00:04:55:00
Jane Parry
By cyclical, you mean?

00:04:55:00 - 00:05:25:00
Tom Hibbert
Industrials, things like that, performing very well. And then on the flip side, because you've got investors that are a little bit more cautious around the tech Capex. And following a period of strong performance within technology, there is a little bit of a defensive undercurrent to this market rotation at the moment. So investors are selling their tech stocks that have performed very well and they're starting to buy very cheap, and you know, some would say relatively undervalued defensive companies. 

00:05:25:00 - 00:05:26:00
Jane Parry
So defensive companies

00:05:26:00 - 00:05:27:00
Tom Hibbert
So, things like consumer staples.

00:05:27:00 - 00:05:28:00
Jane Parry
So what sort of things come into consumer staples?

00:05:28:00 - 00:05:56:00
Tom Hibbert
Those are consumer goods that are less tied to the economic cycle. So non-discretionary. Basics. So, you know cleaning products, food. And then healthcare performing well as well. So two components, I would say, the cyclical parts of the market doing well in June, some of the defences are performing particularly well in in July. But both of these things are happening at the moment.

00:05:56:00 - 00:06:01:00
Jane Parry
Okay. Plus, the tech bubble coming off a little bit. 

00:06:02:00 - 00:06:03:00
Tom Hibbert
Exactly right. 

00:06:03:00 - 00:06:08:00
Jane Parry
Okay. So this market breadth. That's a sign of strength not of weakness?

00:06:08:00 - 00:06:30:00
Tom Hibbert
And the reason it's a sign of strength is because we're also seeing such fantastic earnings still coming through. So we’re in the middle of earnings season at the moment, Q2 earnings companies are reporting at the moment, we're about a third of the way through that. We're on schedule. And sorry to focus on the US but it's such a good example. We're on schedule for a ninth consecutive quarter of double-digit earnings growth.

00:06:34:00 - 00:06:34:00
Jane Parry
That's amazing, isn’t it?

00:06:34:00 - 00:07:22:00
Tom Hibbert
It really is amazing. It's broad earnings strength, which is actually, the earnings growth is still concentrated, it's still you know, the best example of that is still within tech, which we can touch on. But there's such earnings strength combined with strong economic activity. Balance sheets are strong in the corporate landscape strong. All of this is supporting a broadening out of the equity market. The reason why we've still got strong results within tech, but we're seeing weakness within the sector, is because analysts aren't concerned about current profitability, particularly within, at the bottom of the AI capex pyramid, because the flow of capital is going down the pyramid, particularly to the chip manufacturers. They're very profitable. But there is scrutiny about how sustainable this investment is.

00:07:22:00 - 00:07:23:00
Jane Parry
Yeah, which we have talked about.

00:07:23:00 - 00:07:28:00
Tom Hibbert
Which we've spoken about before, and that is the key question now.

00:07:28:00 - 00:07:35:00
Jane Parry
Okay. So, a reason for measured confidence but not a guarantee all markets will continue rising, I guess, at the moment.

00:07:35:00 - 00:07:43:00
Tom Hibbert
Yeah, I think you've got to pick your spots and pick how you build your portfolio. And we would recommend, you know Leah spoke about diversification last week.

00:07:43:00 - 00:07:48:00
Jane Parry
We did. We talked about the football team attackers and defenders. And a bit of midfield.

00:07:48:00 - 00:07:48:00
Tom Hibbert
Yeah. Okay.

00:07:48:00 - 00:07:51:00
Jane Parry
We talked about Harry Kane. You should listen to it.

00:07:51:00 - 00:08:10:00
Tom Hibbert
I should, I should do. But balancing you know, capturing the opportunities from this strong earnings backdrop alongside the relative value opportunities and defensive sectors, you get this balance between more defensive relative value and quite exciting opportunities within industrials in particular.

00:08:10:00 - 00:08:18:00
Jane Parry
So just thinking about our clients and our listeners, what does this all mean for investment portfolios then?

00:08:18:00 - 00:08:56:00
Tom Hibbert
Well, it means that the outlook is still broadly positive. That we are still seeing, the economic landscape is still very good. We're still seeing good growth. We're seeing good corporate earnings coming through. So that is quite exciting. And we're still broadly, you know, mostly positive. And it's helpful for diversified portfolios, which is you know, it's good if you see a more material sort of tech weakness amidst still a strong economic environment. Your portfolios can still perform well. So, you don't want to be too, you want to maintain a diversified overall portfolio, and it's good to see a broadening out of performance. In fact, it's healthy.

00:08:56:00 - 00:09:45:00
Jane Parry
Yeah. Okay. Nice. Thank you. I think I probably should sum up what is in my Canaccord takeaway coffee cup this week. So, we talked about the froth in the headlines. And they have once again been focused on what we've called the semiconductor summer swoon. But beneath the surface, something more encouraging is brewing in my coffee cup, I think. It sounds like most companies are on the rise. The earnings season is strong across the board so far anyway. And as a result, the markets leadership is broadening out beyond a narrow group of tech giants, which for clients and those people preferring a more diversified portfolio for the longer term, feels like that's a sturdier way to go, standing on more legs than balancing on a couple.

00:09:45:00 - 00:09:47:00
Tom Hibbert
That's right. 

00:09:47:00 - 00:09:52:00
Jane Parry
And for long-term patient investors, I think that sounds like a good reason for quiet confidence going forward.

00:09:52:00 - 00:10:11:00
Tom Hibbert
Exactly right. I think there are four pillars to look at, to really look at, at the moment. One is the broadening out trends that we've discussed today. The second is the solid earnings landscape we're seeing across the board. And then some of the concerns around increased competition, particularly from China, poses a threat to -

00:10:11:00 - 00:10:12:00
Jane Parry
The DeepSeek question.

00:10:12:00 - 00:10:31:00
Tom Hibbert
The DeepSeek question, exactly. And then, connected to that, all of the investments that we're seeing, half $1 trillion of investment into the AI build out hyper scalers this year. I mean, it's vast and we're seeing a little bit of indigestion there as investors are scrutinising that investment cycle.

00:10:31:00 - 00:10:33:00
Jane Parry
The right thing to do as well.

00:10:33:00 - 00:10:33:00
Tom Hibbert
Absolutely.

00:10:33:00 - 00:10:37:00
Jane Parry
Yeah. Good. Thank you very much. Welcome back. 

00:10:37:00 - 00:10:38:00
Tom Hibbert
Thank you. 

00:10:38:00 - 00:10:39:00
Jane Parry
Been missing you the last couple of weeks.

00:10:39:00 - 00:10:40:00
Tom Hibbert
Oh, that's very kind.

00:10:40:00 - 00:10:58:00
Jane Parry
And thank you to everyone for listening to the Canaccord Coffee Break podcast. We hope you've enjoyed it. Don't forget to hit follow on your preferred podcast channel of choice so you don't miss an episode. And as always, we'd love to hear your thoughts, your feedback, your challenges even. Drop us an email coffeebreak@canaccord.com

00:10:58:00 - 00:11:00:00
Tom Hibbert
And thank you for all the helpful feedback.

00:11:00:00 - 00:11:01:00
Jane Parry
Yeah, really helpful.

00:11:01:00 - 00:11:02:00
Tom Hibbert
It has been good, so thank you

00:11:02:00 - 00:11:04:00
Jane Parry
Thank you.

00:11:04:00 - 00:11:26:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:05 - 00:00:26:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And again this week I'm delighted to be joined by Leah Bramwell, who is our Head of Tailored Investment Solutions from our Chief Investment Office. Welcome back. 

00:00:26:00 - 00:00:28:00
Leah Bramwell
Morning, Jane. Double header for you. 

00:00:28:00 - 00:01:51:00
Jane Parry
Yeah. Two weeks on the trot. Love it. So, as you know, each week on the podcast, we try to cut through the noise and demystify what's going on in the market just so you can feel more informed, more confident, and more in control of your financial future. So this week, Leah, I want to talk about the diversification illusion. Most of us think diversification is one of the simplest rules in investing. But what if your portfolio is far more concentrated than you realise? So this week I'm asking that very question - are you really as diversified as you think? And what's triggered this has stemmed from what's happening in the Korean market, which we talked about in detail a few weeks ago on the podcast. So I'd refer you back to that if you want to hear a bit more about that market, and in particular, the extraordinary rise of a couple of stocks there, which now make up a huge proportion of the Korean market, and that, I think, is just symbolic of this whole concentration risk as opposed to diversification, and really just making sure that people understand what actually is in their portfolio. So grab a coffee, let’s dive on in. Before we get into Korea and why that has triggered today's conversation, could you just help us understand a little bit more about diversification and why it's so important as an investment theme? 

00:01:51:00 - 00:02:02:00
Leah Bramwell
Yes, I think most people will be aware of the don't put too many eggs in one basket, which is your classic diversification metaphor. We often talk about football metaphors in our Canaccord office. 

00:02:02:00 - 00:02:06:00
Jane Parry
Yeah, well, that's because we're surrounded by boys who love football and the World Cup.

00:02:06:00 - 00:02:45:00
Leah Bramwell
Exactly. I don't think we're quite too late for a World Cup reference. So I think it's really helpful to think about your portfolio as a team. And you want some attackers and some defenders. You wouldn't put a team together which is all attacking, as wonderful as Harry Kane is, but you also wouldn't put together a team which is all defenders, usually. For the most part, against most opposition, you want a nice balanced team with some attack and some defence and some midfield. And the same is true of an investment portfolio. You want some things which are providing that attack and some things which can protect you when things go wrong.

00:02:45:00 - 00:02:59:00
Jane Parry
Okie dokie. So, the difference then in terms of what we're talking about today and in particular emerging markets, what's the difference between owning countries and owning themes for a diversification?

00:02:59:00 - 00:03:24:00
Leah Bramwell
So within an emerging market bucket you have a very strong exposure to a particular theme. So whilst you have exposure to lots of different countries, you might also have exposure to the same theme which appears across different countries. So you need to be aware of what is underlying the index or the country that you're thinking about investing in.

00:03:24:00 - 00:03:28:00
Jane Parry
So when investors hear emerging markets what is it they think they're buying? 

00:03:28:00 - 00:04:06:00
Leah Bramwell
So, usually, people are aware that emerging markets span the economies which don't make up the developed market indices. So the most commonly understood and held emerging markets would be China, India, Taiwan, South Korea, Brazil. Those are the five most well-known. But actually, there's a huge whole world of emerging markets and below emerging market at frontier markets. Frontier markets which have stock markets and investable companies but don't quite make up the emerging market status yet.

00:04:06:00 - 00:04:14:00
Jane Parry
So developed, emerging and frontiers. Okay. So the Korean market, where would that sit?

00:04:14:00 - 00:04:20:00
Leah Bramwell
That is firmly in the emerging market bucket and is one of the largest emerging markets.

00:04:20:00 - 00:04:29:00
Jane Parry 
So let's have a look at that in a bit more detail. And particularly the two equities that we talked about a few weeks ago and what's happening there.

00:04:29:00 - 00:04:29:00
Leah Bramwell
Yeah. So there's two semiconductor companies within the South Korean market, Samsung Electronics and SK Hynix. And those have had phenomenal runs year-to-date. And at a point in time, those two companies made up more than 50% of the South Korean index. Now there has been a fairly sharp pullback over recent weeks, so that weighting has come down, but it's still significant within the context of the index.

00:04:59:00 - 00:05:10:00
Jane Parry
So I guess also if you've got a Korean, you own a Korean fund or an emerging market fund, you're heavily reliant on those two companies as part of -

00:05:10:00 - 00:05:35:00
Leah Bramwell
Exactly right. So you're very exposed to that theme, particularly if you're holding a specific Korean tracker, but also within an emerging market tracker, because within emerging markets, more than 75% of an emerging market index is made up of the top four emerging markets. So that would include South Korea, Taiwan, China and India.

00:05:35:00 - 00:05:37:00
Jane Parry
So not diversified at all then.

00:05:37:00 - 00:05:39:00
Leah Bramwell
Not particularly diversified.

00:05:39:00 - 00:06:00:00
Jane Parry
Okay. So most people I think assume that if they hold an emerging market fund, it will give them broad exposure to growing economies around the world. But increasingly then from what you've just said, they are buying actually into the global AI story rather than the local economic growth story.

00:06:00:00 - 00:06:35:00
Leah Bramwell
Yes, exactly. And not all indices are made equal. And I think it's worth bearing in mind also that this applies to a global index as well. You know, if you hear a global index you think, oh, I'm getting exposure to the global equity market. But actually, that's heavily concentrated both in the US and within the US, in the very large companies that make up the US index. So this isn't an EM specific phenomenon. This is the challenge with passive investment which is those indices. They’re tracker funds. So you just need to be aware of what's making up -

00:06:35:00 - 00:06:43:00
Jane Parry
So you need to really know exactly which index you're tracking and therefore what is in your portfolio beneath the surface.

00:06:43:00 - 00:06:44:00
Leah Bramwell
Exactly.

00:06:44:00 - 00:06:58:00
Jane Parry
Yeah. Okay I understand. So what other markets then might be more interesting maybe in the emerging market space that are perhaps uncorrelated with AI, because AI is the concentration risk I think is what we're talking about, isn't it?

00:06:58:00 - 00:07:31:00
Leah Bramwell
Yes, exactly. So your AI concentration risk, you're trying to look for something that you're not getting from a global or a US market tracker. That most people when they're investing in emerging markets, that's what they want. And there are lots of markets that will provide that on the smaller end of the emerging market scale or the larger end of the frontier markets. So markets such as the Philippines, Kenya, Vietnam, Indonesia, South Africa, even India, which is a very large emerging market, has relatively little exposure to that theme.

00:07:31:00 - 00:07:40:00
Jane Parry
Okay. Thank you. And if someone listening does own an index or tracker fund, what are the two or three things they should check to understand what they're really invested in?

00:07:40:00 - 00:08:09:00
Leah Bramwell
So your first thing to check is what the companies underlying that index, what they are, and also to make sure that if you're owning multiple trackers, like a US tracker and a global tracker, that you're aware that there's a very high level of crossover between those two trackers. So be aware of what's underlying your holdings. And beyond that, be aware of the themes. So if you've got a Korean market tracker and a US market tracker, be aware that -

00:08:09:00 -00:08:10:00
Jane Parry
You're going to be heavy on -

00:08:10:00 - 00:08:12:00
Leah Bramwell
You’re going to be very heavy on semiconductors.

00:08:12:00 - 00:08:13:00
Jane Parry
Yeah.

00:08:13:00 - 00:08:53:00
Leah Bramwell
Yeah, yeah. So, I'm not saying at all that you don't want to have exposure to those areas. It's prudent to have some exposure to those areas. But you want to be aware of how much you have. And we talked about it a bit last week, didn't we, that markets can be very volatile and there can be a lot of noise. And this week the noise is around worries about the CapEx capital expenditure plans of these AI companies and markets are wobbling. And the risk is if you have too much exposure to that particular theme, you see your portfolio go down maybe more than you expected it would. And then you make bad decisions because you're panicking or you're fearful. Those behavioural biases come in once again.

00:08:53:00 - 00:09:01:00
Jane Parry
Yeah. Understood. So just thinking about emerging markets, what role should they play in a long-term portfolio then?

00:09:01:00 - 00:09:06:00
Leah Bramwell
So emerging markets make up over half of the world's population.

00:09:06:00 - 00:09:07:00
Jane Parry
They’re huge markets.

00:09:07:00 - 00:09:57:00
Leah Bramwell
A huge market in demographic terms and nearly half of the world's GDP. And that has risen quite dramatically in recent decades. But they still make up only about 10% of global equity markets. I think that's a really interesting dynamic. That's a really powerful demographic and economic factors are at play. And that has been the case for many years, even decades. But I think if we're looking forward 30, 50 years, if you're looking at a child's portfolio, for my young children, tech is absolutely a theme that I want to play. But EM is also very, very high on the list. If you look at how you think the world is going to change over future decades not one, three, five years, but future decades, I think emerging markets are really, really important exposure to have in the long-term.

00:09:57:00 - 00:10:03:00
Jane Parry
Presumably accepting that they're going to be a bit riskier, a bit more volatile, so it is a long-term investment.

00:10:03:00 - 00:10:26:00
Leah Bramwell
Exactly. And I think that means that you should be very careful about how you're exposing yourself to that and really look for managers that have proven track records and expertise investing in emerging markets. And there are a lot of those. And it's possible to outperform for active managers in emerging markets in a way that's been really difficult in the US, in particular in recent years.

00:10:26:00 - 00:10:31:00
Jane Parry
And presumably, you and the team are busy finding those fund managers for clients all the time. 

00:10:31:00 - 00:10:32:00
Leah Bramwell
Absolutely. 

00:10:32:00 - 00:11:26:00
Jane Parry
Yeah. Great. Thank you very much. Let me sum up what is in my Canaccord takeaway coffee cup today. There’s quite a lot in there actually, quite a lot of emerging markets. We talked about the diversification illusion and that fund labels perhaps don't tell the whole story. And you think you're in an emerging market fund, but actually you might be in a global AI fund really. And therefore, diversification isn't just about how many countries you own or think you own. It's really about how many different drivers of return you own beneath the surface. Yeah. Very interesting. I think I might need to go and look at what funds I'm in. Thank you for listening to the Coffee Break podcast today. We hope you've enjoyed it. Don't forget to hit follow on your preferred podcast channel of choice so that you never miss an episode. And as always, we'd love to hear your thoughts! Drop us an email coffeebreak@canaccord.com. Thank you.

00:11:26:00 - 00:11:28:00
Leah Bramwell
Thank you, Jane.

00:11:28:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for this specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:28:00
Jane Parry
Good morning, and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And this week I am delighted to be joined by Leah Bramwell, who is from our Chief Investment Office and is our Head of Tailored Investment Solutions. Morning. 

00:00:28:00 - 00:00:29:00
Leah Bramwell
Good morning Jane. 

00:00:29:00 - 00:00:30:00
Jane Parry
Welcome back. 

00:00:30:00 - 00:00:31:00
Leah Bramwell
Thank you. 

00:00:31:00 - 00:01:36:00
Jane Parry
As you know, we are here each week to try and cut through all the market noise, demystify what's going on, and hopefully you will feel more informed, more confident and more in control of your financial future. So this week Leah, I wanted to discuss a couple of headlines, but kind of get a little bit beyond the headlines and think through some of the noise that we hear. So this week's headlines have been around falling inflation in the US; obviously a new government, new prime minister arriving into Downing Street. But I think one of the biggest challenges for clients, for investors and even for ourselves as professional investors is knowing which headlines really matter and how can we sort of cut through all those headline pieces of noise and really work out what really matters? So, let's think about what they can teach us about building wealth over the next decade. So grab your coffee, let's dive on in. So as I mentioned, first off, we have news from the US that their monthly consumer prices fell, I think for the first time in six years, which is pretty good news. So what's happening there?

00:01:36:00 - 00:01:56:00
Leah Bramwell
So as you say, monthly consumer prices fell, driven mostly by a fall in gasoline prices in the US. So that brought the year-on-year rate down to 3.5%. And that core number rising below the consensus expectation. So up 0.2% month-on-month.

00:01:56:00 - 00:02:06:00
Jane Parry
Okay. And the new Fed Chair Kevin Warsh, the US Federal Reserve chair, he's in place now. So what are they making of all of this?

00:02:06:00 - 00:02:58:00
Leah Bramwell
So as we know, Warsh is traditionally viewed by markets as an inflation hawk. So that means that the Fed is likely to lean more towards stability rather than rate cuts which would be pleasing to the markets. So even with a month of soft monthly data or a couple of months of soft monthly data, the Fed's really unlikely to pivot aggressively. 3.5% is still well above the Fed's 2% target. So Warsh has reiterated on numerous occasions that policy makers don't have any tolerance for persistently elevated inflation. And so, we wouldn't expect a month or two of softer numbers, which really is to be expected given the volatility in energy prices to lead to a huge policy shift from the Fed.

00:02:58:00 - 00:03:12:00
Jane Parry
Okay. So all sounds like good news. So going back to what I said at the beginning. How do you distinguish between a noisy data point or one or two months of data versus a meaningful trend?

00:03:12:00 - 00:04:04:00
Leah Bramwell
Yeah. So markets will often react to data points because there's a lot of algorithmic trading that goes on in the markets. And those models can be triggered by headline numbers. So a headline that comes out can lead to buying and selling almost instantaneously, and in combination with a very high level of passive ownership in the market. So people who aren't making active decisions on whether to buy and sell, that can lead to short term volatility around those data points. For longer term investors, though, the structural factors sort of behind that, behind those numbers are much more important. So, we really need to encourage our clients to look through that short-term noise, particularly political short-term noise, but also economic short-term noise to focus on their longer term aims and objectives.

00:04:04:00 - 00:04:19:00
Jane Parry
So I know past performance isn't a guarantee of future performance and all of that. But if you look back over, say, the last 10 or 20 years, what factors have you seen that have generally had the biggest impact on investment outcomes?

00:04:19:00 - 00:04:23:00
Leah Bramwell
So earnings are the main factor that drives -

00:04:23:00 - 00:04:28:00
Jane Parry
So what companies are generating, the revenue they're generating, from doing business.

00:04:28:00 - 00:05:13:00
Leah Bramwell
Exactly. So those are underlined by economic growth, by changes in productivity, by innovation and business adaptation, changes in technology, compounding of returns over time. But earnings in themselves, what businesses generate, are by far the most important thing for long-term returns. The correlation between earnings growth and price movements over time, over long periods of time, is very high and valuation changes. So changes in multiple, which we hear talked about a lot at the moment, what people are paying for those earnings, they dominate the short-term returns. But in the long-term it's that earnings growth which really matters.

00:05:13:00 - 00:05:30:00
Jane Parry
Okay. Can we come back to compounding in a minute. But before then just on short-term, why do people then naturally gravitate to all of these short-term developments when really, it's the long-term drivers which are so much more important?

00:05:30:00 - 00:05:34:00
Leah Bramwell
So there’s a whole field of research dedicated to the question.

00:05:34:00 - 00:05:35:00
Jane Parry
You've got about a minute.

00:05:35:00 - 00:05:42:00
Leah Bramwell
I've got a minute. Why do humans behave as they do when they're considering their finance? I mean, there's a couple of things.

00:05:42:00 - 00:05:44:00
Jane Parry
We're just not logical beings, I suppose.

00:05:44:00 - 00:06:53:00
Leah Bramwell
Yeah. I mean, people are not rational, so humans suffer - I mean, there's lots of biases. But on this particular topic, you know, availability bias. So overweighting recent news over longer term news trends and loss aversion as well. So people feel pain of losses a lot more acutely than they feel pleasure from investment gains. So people are really scared of losing money. And they're not rational necessarily when faced with loss relative to gain and media doesn't help in the sense that there's 24-hour media available at people's fingertips. There's increased sort of gamification of finance. You see through trading apps and on social media. You can read about trends any hour of any day. And so long-term investing feels a lot less exciting than short-term moves. Why would I be delighted with an 8% annualised return when people are talking about making hundreds or thousands of percent in days or weeks or months, it's much less exciting.

00:06:53:00 - 00:07:00:00
Jane Parry
Mind you, I think 8%, if you give me 8% every year, forever, there's got to be far more exciting for me in the long-term, hasn’t it?

00:07:00:00 - 00:07:02:00
Leah Bramwell
Wouldn't that be wonderful? You’d be far better off.

00:07:02:00 - 00:07:03:00
Jane Parry
I'd sleep better at night, wouldn't I?

00:07:03:00 - 00:07:15:00
Leah Bramwell
You’d sleep better at night, and I think, of course, people are a lot less noisy when they're losing money than they are when they're making money. And so you don't hear about the flip side of when those investments go wrong.

00:07:15:00 - 00:07:55:00
Jane Parry
Yeah. Yeah, a tricky one I guess, because you are challenging, challenging humans, natural, as you say, biases, behaviours. So we touched on compounding and we've just touched on there about staying invested for longer. So it sounds like identifying great businesses to invest in is only half the challenge. The other half is having the patience to stay invested long enough for that success to show up in their returns.  So why is patience such an important but often overlooked investment skill? And I guess that relates to the importance of compounding returns over time.

00:07:55:00 - 00:08:07:00
Leah Bramwell
Absolutely. So you've touched upon one of the wonderful hidden mysteries, secrets, undercooked things within finance, which is power of compounding.

00:08:07:00 - 00:08:08:00
Jane Parry
We love a little secret.

00:08:08:00 - 00:09:14:00
Leah Bramwell
I mean, it's the most wonderful thing for investors. Because you just have to sit and watch your money grow over time. And the idea is that if you have invested a pot at the beginning and you're getting an interest rate or return on that, that pot at the beginning, that each year your return on that pot grows because the pot size has grown. And if you look at the numbers on how that works, it is a wonderful chart. And, you know, it's really worth having a look into a power of compounding table for our readers. There's a great book about compounding, it’s called Rich Dad, Poor Dad, and there's a table in there which shows that if you invest early in your career and you leave that money invested and you see it compound over time, you have to invest far, far, far less over the course of a lifetime than if you've left it later on in life. So the sooner that you can start, the better. So power of compounding is a really, really important financial concept for all of our listeners to get on board with.

00:09:14:00 - 00:09:29:00
Jane Parry
Do you know, that's really spooky because that Rich Dad, Poor Dad has just popped up into my, I can’t remember if it was my podcast or my audible algorithm feed this week. Oh, spooky. Must be a really important subject. They must be hearing me. 

00:09:29:00 - 00:09:40:00
Leah Bramwell
It was the one financial book that my parents gave me to read as a child, and I would pass it on to everybody I know because it's one of finance’s most important lessons and so overlooked.

00:09:40:00 - 00:09:48:00
Jane Parry
And my other book club recommendation this week is The Psychology of Money. Morgan Housel.

00:09:48:00 - 00:09:49:00
Leah Bramwell
Yes, that's also a great book. And he covers compounding. 

00:09:49:00 - 00:09:50:00
Jane Parry
Yeah he does. 

00:09:50:00 - 00:10:00:00
Leah Bramwell
And some of the things we've been talking about on behaviour as well. Behavioural finance. So really accessible book and really interesting read.

00:10:00:00 - 00:10:30:00
Jane Parry
Okay. New prime minister moving into number ten. So I think we're also all keeping an eye on the new chap in number 11 as well. And what impact that might have on the markets. So when governments change, I think it's just natural for us all to focus on the names. But what really matters more to markets? Is it the people in the names or is it their policies, or is it just about having greater clarity about the future because markets just dislike uncertainty? Or is it kind of all of the above?

00:10:30:00 - 00:10:35:00
Leah Bramwell
Yeah, all of the above, Jane. Markets will automatically be pricing in an uncertainty premium.

00:10:35:00 - 00:10:37:00
Jane Parry
Because it’s a change of regime.

00:10:37:00 - 00:10:59:00
Leah Bramwell
Because there's a change of regime, I mean, that's the case in any country, in any political environment, there will be some level of uncertainty premium. What really matters more to investors, not the identity of the new prime minister or the new chancellor, is how predictable their fiscal path is. So what their spending plans are and how predictable those spending plan are.

00:10:59:00 - 00:11:01:00
Jane Parry
We're still waiting to hear a lot of that at the moment.

00:11:01:00 - 00:11:41:00
Leah Bramwell
Yeah, but I mean gilt markets react very, very quickly. So markets are not looking at what Andy Burnham is saying in his political speeches. You know, they're looking at the gilt curve. And that reacts very, very quickly to changes. And they will react very quickly to any borrowing plans if they're perceived as reckless. And you know, we've talked about this in the past about bond markets holding politicians to account. We've seen that in the very recent past in this country. So investors will be more focused on that, I would think, than the political noise.
 
00:11:41:00 - 00:12:39:00
Jane Parry
Thank you very much. I think it's probably time for me to sum up what is in my Canaccord takeaway coffee cup this week. Really interesting. The headlines were about inflation and politics. You know, that inflation data can move markets for a day, that political developments can dominate headlines for a week, that market sentiment can change from month to month. But underneath all of that, I think we're saying there's the same lesson, one lesson we should be learning, that investors are often rewarded not for predicting every twist and turn, but for focusing on what genuinely drives long term outcomes, and that long term wealth is generally created through economic growth, through business success and the power of compounding over time we talked about. I would say, if you were an investor, invest in patience. That would be my top tip, because I am not a qualified investment analyst, obviously, but it sounds like a good thing to do to me.

00:12:39:00 - 00:12:40:00
Leah Bramwell
It's a great top tip Jane.

00:12:40:00 - 00:13:04:00
Jane Parry
Thank you. Anyway, thank you everybody. Thank you for listening to the Canaccord Coffee Break podcast today. We hope you've enjoyed it. And don't forget to hit follow on your preferred podcast channel of choice, and you will never miss an episode. And as always, we'd love to hear your thoughts. Ask us any questions. If you want to know more about the power of compounding and investing in patience, drop us an email coffeebreak@canaccord.com.  Thank you.

00:13:04:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:24:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And today, I'm delighted to be joined by Tom Hibbert from our Chief Investment Office.

00:00:24:00 - 00:00:25:00
Tom Hibbert
Good morning.

00:00:25:00 - 00:00:40:00
Jane Parry
Morning, morning. As you know, each week we try to cut through the noise and demystify what's happening in the market so that you feel more informed, confident and in control of your financial future. So this week Tom, it has been a week of sport.

00:00:40:00 - 00:00:41:00
Tom Hibbert
Much more interesting.

00:00:41:00 - 00:01:17:00
Jane Parry
Much more interesting than the markets, but that's not what we're here for. Although what I thought might be quite interesting is to compare three areas of sporting competition in Wimbledon, England's World Cup exploits and also the rugby versus three areas of friction, contest competition in the markets. And also I just wanted to say, did you know that here at Canaccord Wealth we have had our own sporting achievements with colleagues cycling from London to Paris in support of our charitable foundation?

00:01:17:00 - 00:01:19:00
Tom Hibbert
Incredible.

00:01:19:00 - 00:01:20:00
Jane Parry
They've raised over £20,000 you know.
 
00:01:20:00 - 00:01:21:00
Tom Hibbert
Amazing.

00:01:21:00 - 00:01:22:00
Jane Parry
Great, they're mad.

00:01:22:00 - 00:01:24:00
Tom Hibbert
Rather them than me, but well done to them.

00:01:24:00 - 00:01:27:00
Jane Parry
Yeah, well done to them. It was 30 odd degrees heat, so they did really well.

00:01:27:00 - 00:01:30:00
Tom Hibbert
The first pint in Paris would have been quite nice.

00:01:30:00 - 00:01:31:00
Jane Parry
Yeah, I'm sure.

00:01:31:00 - 00:01:32:00
Tom Hibbert
Glass of rose, whatever it is.

00:01:32:00 - 00:01:55:00
Jane Parry
So this week then, I'm asking, where is the greater contest? Is it on the football pitch or is it in the markets? So grab your coffee, let's dive on in. So contest #1, let's talk about equities. Equities and geopolitical drama, the ongoing political headlines that we're seeing and all the noise coming out of the Middle East. What's happening there then?

00:01:55:00 - 00:02:51:00
Tom Hibbert
Yeah, I mean, I think it's quite clear if you, and I actually said this on CNBC, that the peace deal was always vulnerable, the memorandum of understanding and the US had clearly won or was winning the military contest. But Iran has enough capability to still close the Hormuz and fundamentally is there for winning the economic war. So if you've got, the US considers themselves the winner on the one hand and Iran on the economic front, they both think they have the upper hands in the negotiation and the collapse of the deal, I think it's evidence that there's not enough for them to really find a middle ground or for them to concede in negotiations. And therefore perhaps we're likely now in a sort of the tensions are likely to remain high for the time being.

00:02:51:00 - 00:02:55:00
Jane Parry
So how does that play out? What tensions does that?

00:02:55:00 - 00:03:24:00
Tom Hibbert
Within equities, yeah, I mean it's because the economies have been so malleable with regards to oil consumption and economies have released the China and the US have drawn down significantly on reserves. The equity market has been, the oil prices, you know at the end of the month it was at pre-war levels, which is just remarkable and oil prices are rising again now. But the market, it just isn't hugely worried about that.

00:03:24:00 - 00:03:27:00
Jane Parry
Is the market or are investors underestimating the risk here and the volatility?

00:03:27:00 - 00:04:34:00
Tom Hibbert
I think because reserves have been significantly drawn down, you can only do that for some time. Yes, we've been surprised by the flexibility of the economy to adjust to that oil shock. There is a risk that you might see a more sensitive economy going forward because you can't keep going down in reserves. I think there's that, but also the market isn't as concerned about a material escalation because neither side really wants a material escalation. I think that's quite clear as well. So yes, there's an elevated risk of that, but I think the volatility seen in equity markets is capped a little bit by both sides’ hesitance to actually materially escalate the conflict. So we're likely to see a sort of continuation of elevated tensions, various strikes, but no sort of boots on the ground if you see what I mean? So that's the first area we're seeing a little bit of volatility in in the last week, but maybe not as much as you might have expected.

00:04:34:00 - 00:04:51:00
Jane Parry
OK, so football's still willing out as the greater contest at the moment. So what about the corporate bond markets? Actually, I saw this week that Amazon have issued a large bond, $25 billion was it?

00:04:51:00 - 00:06:06:00
Tom Hibbert
Yeah, that's right. And it's one in a long line of hyperscaler issuances that we've seen a huge amount of. We're seeing huge amounts of CapEx related to the data centre build out, the AI build out and those companies are tapping, you know, their equity markets and corporate bond markets in particular. And we saw Amazon do so last week. Historically, these issuances have been met with huge demand and we've just, we've just started to see a little bit of indigestion a little. We saw that, yeah, we saw this with Amazon last week. And I think investors since, you know, this month, there's been a little bit of vulnerability within areas of tech generally after a period of extremely strong performance. And we're now seeing that across equity markets and in corporate bond markets as well. And I think this is likely going to be an area of friction as we look ahead. And will we see that tech CapEx cycle roll over a little bit when we're starting to see size of that in June?

00:06:06:00 - 00:06:29:00
Jane Parry
OK, interesting. So third contest that we're looking at in the markets is UK gilts and UK politics grabbing plenty of attention. And I think UK gilts had another difficult week, we talked about it in quite a lot of detail with Peter last week. So what's worrying investors here then?

00:06:29:00 - 00:07:19:00
Tom Hibbert
Gilts had actually been very strong in in May and through June as well. And gilts are vulnerable on the back of this geopolitical uncertainty that we're seeing and the energy shock related to that. So we're seeing gilts now, gilt yields are rising at the moment. So prices are falling. A lot of that is driven by the geopolitical developments, but you also have the additional fiscal uncertainty and political uncertainty. And Andy Burnham, I think the area of friction or competition that I would highlight is the bond market's sensitivity to any unfunded spending. And Andy Burnham will want to spend more and maybe he'll look to relax the fiscal rules. We'll see.

00:07:19:00 - 00:07:22:00
Jane Parry
So what would bond investors want from him then?

00:07:22:00 - 00:07:56:00
Tom Hibbert
They, he’ll need to get a bond market on side and I think what they really want is efficient spending. So, you know, you might talk about growth, but they want policies that are actually delivering growth and not excessive spending. It needs to be balanced and I think the market will be playing close, close attention to that. He really needs to get the support of the bond market before he sort of overseas a significant fiscal expansion. And this is easier said than done.

00:07:56:00 - 00:08:00:00
Jane Parry
So definitely a potential area of tension there, the contest.

00:08:00:00 - 00:08:17:00
Tom Hibbert
Exactly. And this week the 10-year gilt yield is back up above 5%. I think that political risk premium, that fiscal uncertainty is likely to remain within the gilt market for the time being. So that's something that we'll see play out at the moment.

00:08:17:00 - 00:08:44:00
Jane Parry
Thank you. So I should sum up what is in my Canaccord take away coffee cup today. This week's headlines may have been dominated by sport, but definitely geopolitical events seem to be the most important contest for investors across all markets actually, whether it's equities, corporate bonds or gilts. But the markets appear to remain resilient.

00:08:44:00 - 00:08:46:00
Tom Hibbert
Absolutely, that's a key point.

00:08:46:00 - 00:09:20:00
Jane Parry
Yeah. And when we're not watching Wimbledon or the football, you are watching key themes very closely on our behalf, thank you. Inflation we talked about, particularly linked to oil prices and AI, governments, government funding and borrowing becoming increasingly expensive, so getting the gilt markets on side. And then we talked about investors becoming the financiers of the enormous AI investment boom, but actually needing a return off the back of that investment going forward, otherwise tensions may rise there.

00:09:20:00 - 00:09:25:00
Tom Hibbert
Exactly, something that we're monitoring, monitoring that indigestion in the corporate bond market at the moment.

00:09:25:00 - 00:09:37:00
Jane Parry
Lovely. Thank you very much. And as ever, we would say stay focused on diversification, remain flexible and pay close attention to what the markets are telling us. So once again, thank you very much. 

00:09:37:00 - 00:09:39:00
Tom Hibbert
Thanks for having me back, Jane. 

00:09:39:00 - 00:09:57:00
Jane Parry
And thank you everyone for listening to the Coffee Break Podcast. If you've enjoyed it, don't forget to hit follow on your preferred podcast channel of choice and you will never miss an episode. And as always, we'd love to hear your thoughts. Drop us an e-mail, ask us any questions, the e-mail address is coffeebreak@canaccord.com. 

00:09:57:00 - 00:09:58:00
Tom Hibbert
Thank you.

00:09:58:00 - 00:09:59:00
Jane Parry
Thank you.

00:09:59:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:45:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break Podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And today I'm delighted to be joined by Peter Davies from our Chief Investment Office. Morning. Peter is the Head of Direct Fixed Income here at Canaccord Wealth and is normally based in our Jersey office. So he’s flown over especially this morning to record the podcast. So welcome. So the first thing we ask for people on the Coffee Break podcast for the first time is, what is your coffee of choice?

00:00:45:00 - 00:00:46:00
Peter Davies
It's a latte.

00:00:46:00 - 00:00:47:00
Jane Parry
A latte.

00:00:47:00 - 00:00:48:00
Peter Davies
Soft coffee.

00:00:48:00 - 00:02:02:00
Jane Parry
It is a bit of a soft coffee. We’re normally espressos and black americanos here, although I'm on iced coffee this week because it is so hot. So Peter, as you know, each week on the podcast, what we try to do is cut through the noise, demystify what's happening in the markets, and then hopefully our listeners can feel more informed, more confident and more in control of their financial future. So this week, with Andy Burnham's arrival on the national stage, it's prompted a bit of fresh discussion about the UK's fiscal outlook. But I actually thought the more interesting story is about the power of the bond markets rather than the politics themselves. So given you are our Head of Direct Fixed Income, I'd like to talk to you about that in a little bit more detail, if that's okay, and particularly the UK gilt market. So I'm asking why do bond markets have so much power over governments and what does this mean for investors? But before we get into that, could you just remind us what is direct fixed income investment? And also just a little snippet on what you do on a day-to-day basis because you're new to the podcast and our listeners.

00:02:02:00 - 00:02:30:00
Peter Davies
Sure. So, a lot of our assets here at Canaccord are invested in 3rd party funds and some of those are fixed income, fixed income funds that are invested in a wide array of fixed income assets. But for some investors, it's more suitable to go directly into bonds without going through the funds and invest directly into corporate bond markets where they know their cash flows, they can control their investments more, and it's more suitable for investors with a larger amount of capital to invest.

00:02:30:00 - 00:02:36:00
Jane Parry
And so day-to-day, you're looking for those direct corporate bonds to invest in on behalf of clients.

00:02:36:00 - 00:02:49:00
Peter Davies
Yeah, exactly. Day-to-day we run a corporate bond fund, we run direct corporate bond investments and day-to-day, you know, my job is to invest those and help other investment managers around the firm to invest their capital into fixed income assets as well.
 
00:02:49:00 - 00:03:06:00
Jane Parry
Brilliant. Thank you. Well, grab your coffee, grab your latte and let's have a little look into the UK gilts market and what's going on at the moment. Probably before we get into it, could you just give us a quick gilts 101 for listeners who might not know exactly what a gilt is?

00:03:06:00 - 00:03:12:00
Peter Davies
Sure. Well, I actually used to work at the debt management office who were responsible for issuing gilts.

00:03:12:00 - 00:03:15:00
Jane Parry
Were you?

00:03:15:00 - 00:03:34:00
Peter Davies
I was there for five years for the government so I've got a bit of insight into the gilt markets, and effectively they're a loan, a transferable loan to the UK government where you have a set of cash flows, like any other bond. It pays a coupon and it pays a fixed amount on maturity as well.

00:03:34:00 - 00:03:35:00
Jane Parry
So the coupon is the interest rate.

00:03:35:00 - 0:04:00:00
Peter Davies
The coupon is the interest rate and the price is set by the market. So you know you're getting back, the convention is to talk about getting back £100 at maturity. So how much you buy that gilt for will determine your overall return over that period. And those maturities can extend out to as long as 50 years. And you know roughly 1/4 of those gilts are also linked to inflation as well. Their returns are somewhat based on inflation.

0:04:00:00 - 00:04:09:00
Jane Parry
So for listeners who don't necessarily spend their days watching the gilt market like you do, why do governments care so much about the bond markets?

00:04:09:00 - 00:04:33:00
Peter Davies
Well, it's a large amount of how they finance themselves. And although they control a lot of fiscal policy, they can control taxation and they can control their spending, theoretically, they can't control the price of price at which they can sell their debt. That affects the government in a lot of ways. It affects them in terms of how much interest they have to pay in their own debt and a lot of it is rolled over every single year.

00:04:33:00 - 00:04:34:00
Jane Parry
Ultimately refinanced.

00:04:34:00 - 00:04:47:00
Peter Davies
Exactly. It also affects the members of the public too in terms of a lot of what their day-to-day spending is affected by interest rates, their mortgages are affected by longer term interest rates. So it affects governments in -

00:04:47:00 - 00:04:58:00
Jane Parry
So it ripples out across the whole economy. So essentially the government is issuing gilts to try and raise capital for projects, initiatives, activities that they want to do.

00:04:58:00 - 00:05:08:00
Peter Davies
Projects, initiatives and the government has a, you know, a wide array of things they spend the money on. Some of it are projects, some of it is day-to-day spending. And gilts just feed into that difference between what they can raise in taxes and what they have to spend.

00:05:08:00 - 00:05:23:00
Jane Parry
OK. Got it. So the headlines are telling us that 30-year gilts have moved much higher, the yield on those gilts has moved much higher in the last week or so. So what is the market telling us with that?

00:05:23:00 - 00:05:55:00
Peter Davies
There's a number of factors affecting the longer end of the gilt market. Sometimes in the last week or two, it's actually been more international-driven. US yields have gone up as well. European yields have gone up too and some of that is just due to central banks and their stance on inflation. And a lot, a large part of it, is also to do with confidence in the governments as well. So, in the last week or so, some of that has been more to do with a bit of economic data and the US central bank. But in the past, and certainly in recent past, it's been a little bit to do with UK fiscal policy and outlook.

00:05:55:00 - 00:06:01:00
Jane Parry
OK. So longer dated gilts, they're more sensitive to political risk, are they, than shorter dated gilts?

00:06:01:00 - 00:06:20:00
Peter Davies
They definitely are, the shorter end of the gilt market is more closely tied to the central bank and the rates that central banks set and the longer end of the gilt market is tied to the long-term outlook for the government. And it's also affected a little bit by the fact that there's a little bit more speculative investment at the longer end of the gilt curve.

00:06:20:00 - 00:06:31:00
Jane Parry
Yeah. So why are investors demanding a higher gilt yield now, maybe than they were a year ago? What's changed in that period?

00:06:31:00 - 00:07:12:00
Peter Davies
Yeah, there's a number of things there, but one of the main things I think is, and it has been for a while, the political uncertainty as well and the fiscal outlook. A lot of governments are highly indebted and when they're highly indebted, it is more difficult to issue more debt. And it's a supply and demand issue. So if there's a lot more supply coming because they have to roll over their debt, they have to raise the money, supply of gilt, then yields go up. So you know, at the moment I think, certainly in the UK market, there's a certain amount of political uncertainty. I think we're going to have five prime ministers over the last five years and nobody's quite sure about what that means for fiscal policy.

00:07:12:00 - 00:07:19:00
Jane Parry
So it's a bit of a report card on how disciplined government fiscal policy is and the future confidence.

00:07:19:00 - 00:07:22:00
Peter Davies
It is, and it can be a very strong report card sometimes as well.

00:07:22:00 - 00:07:26:00
Jane Parry
So have bond markets become more powerful then in recent times?

00:07:26:00 - 00:07:52:00
Peter Davies
Yeah, they have. I mean as debt has gone up, that cost, that amount of debt that they have to roll over becomes larger and larger. Interest rates have also gone up. So the payments on that debt have become higher and higher. As with the UK, some of that debt is tied to inflation. As inflation goes up, their interest payments become higher. So the government becomes very sensitive and the amount of interest we have to pay on gilts at the moment is over 100, a 100 billion a year, bigger than a lot of -

00:07:52:00 - 00:08:11:00
Jane Parry
Hang on, £100 billion a year on interest? Wow, that's quite a lot, isn't it? So actually, the power of the bond markets is they can potentially stop governments implementing the projects that they would otherwise like to deliver.

00:08:11:00 - 00:08:43:00
Peter Davies
Exactly. So, I think it was famously illustrated back in the US in 93 when Bill Clinton tried to announce policy spending and spending on his programs and the bond market sold off rapidly before he had to make a U-turn and come back in it. In the UK, it was recently evident with the Liz Truss government. Liz Truss who funded spending plans and you know, UK gilts and sold off nearly 100 basis points in a few days and forced them to do a U turn.

00:08:43:00 - 00:09:01:00
Jane Parry
OK, interesting. So the other thing I wanted to ask you about was the term bond vigilantes, which I thought was something out of a spaghetti western, but apparently is not out of a spaghetti western. It seems to have come back into fashion. Did bond vigilantes go away and have they come back? What are they? Who are they? 

00:09:01:00 - 00:09:05:00
Peter Davies
Well, they've always been around, but in reality, they're just rational bond investors.

00:09:05:00 - 00:09:09:00
Jane Parry
Rational bond investors? That's not quite sexy to say as bond vigilantes, is it?

00:09:09:00 - 00:09:30:00
Peter Davies
No. It's not. I mean, the coin was termed in the early 80s with the Reagan administration. But since then, the term has come back in periods of volatile movements in the bond markets with investors not wishing to hold government bonds when they see that the risks are too high or there's a lot of supply coming in the market, those yields move higher and can often force governments to change their spending plans and change their fiscal policies.

00:09:30:00 - 00:09:39:00
Jane Parry
Okay, as we were talking about before, so the bond vigilantes are really just sort of out there keeping an eye on the government spending for the rest of us.

00:09:39:00 - 00:09:48:00
Peter Davies
It's not a shadowy organisation. It’s a number of investors selling government bonds because they don't like the yield.

00:09:48:00 - 00:09:52:00
Jane Parry
And this yield that's gone up in the UK gilts of late, is it just a UK issue or is it global?

00:09:52:00 - 00:10:21:00
Peter Davies
Yields have gone up everywhere, but it was especially acute in the UK, you know, a few months ago when Andy Burnham announced his candidacy for the Bakerfield by-election. I think 30-year gilts hit their 30-year highs at around 5.85%. Since, he's managed to reassure markets somewhat and they've come down since then. But it's not just a UK issue, it's everywhere. But it's just particularly pronounced in the UK at the moment.

00:10:21:00 - 00:10:28:00
Jane Parry
So are they giving him the benefit of the doubt, you know, is this a Burnham issue or is it a UK fiscal future confidence issue?

00:10:28:00 - 00:10:44:00
Peter Davies
It's a little bit of both, UK growth is not particularly high at the moment. Growth outlook isn't high. The UK debt is high, UK interest payments are high. But he has managed to reassure markets and the yields have come back down somewhat since his candidacy.

00:10:44:00 - 00:11:26:00
Jane Parry
Interesting. Thank you very much indeed. Thank you for your time. I think it's probably good for me to sum up what is in my Canaccord take away coffee cup today. So, this week's story isn't really about Andy Burnham, it's about a reality every government faces. Whether it's borrowing to fund growth or defence or public services, the bond markets ultimately decide the price of that funding through the yields. And it's a reminder really that whoever occupies Downing Street, the bond market remains one of the most powerful forces in the global, in the UK economy. And governments can make all the promises they like, but investors ultimately decide how much those promises are going to cost them.

00:11:26:00 - 00:11:28:00
Peter Davies
You summed it up nicely.

00:11:28:00 - 00:11:58:00
Jane Parry
Thank you very much and thank you for coming to see us. It's lovely to have you here. Thank you everyone for listening to the Canaccord Coffee Break Podcast. We hope you've enjoyed it. Hope you've learned a little bit more about gilts. Don't forget to hit follow on your preferred podcast channel of choice and you will never miss an episode. And as always, we'd love to hear your thoughts. Drop us a line. The email address is coffeebreak@canaccord.com. And I'm sure Peter will answer any other gilt questions you may have if you want to drop us a line there. And thank you again.

00:11:58:00 - 00:12:00:00
Peter Davies
Thanks very much Jane.

00:12:00:00
Speaker 3
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