Our weekly podcast

00:00:10:00 - 00:00:22:00
Jane Parry
Hello 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 John Pullar-Strecker. Morning, morning.

00:00:22:00 - 00:00:24:00
John Pullar-Strecker
Hi, Jane. Morning. Happy Christmas.

00:00:24:00 - 00:03:03:00
Jane Parry
Happy Christmas and welcome to a special edition of our podcast. So, John and the Chief Investment Office team often investigate early ideas and research and analyse things that we might be interested investing in on behalf of clients in the future. So, we thought because it's Christmas, rather than bringing our usual bite-sized market insight, we would give you a little bit of a thought-provoking vision of Christmas in the future. So just to be clear up front, John is definitely not a physicist, but John is an excellent research analyst. With that in mind, we're definitely not going to get too technical here, but just some food for thought. So this is way outside my comfort zone, John. It's something I have no idea about at all. I'm quite sure our listeners will probably feel the same in the main. But we are going to take a tour, a magical mystery tour of this brave new world of quantum and quantum computing, which is both mind-blowing and very weird. But we are going to start the podcast off with a quote from the CEO of Alphabet, who are the owners of Google, who is a chap by the name of Sundar Pichai. He said last month, “I would say quantum is where AI was five years ago”. So, I think in five years from now we'll be going through a very exciting phase in quantum. I think we just need to all hold that thought as we go on this magical mystery tour. So our world of wonder, as it is Christmas, is going to take us into the life of the Christmas Robin. A Christmas Robin is a bird which migrates. And this apparently proves that quantum is real in nature. So, John's going to talk to us a little bit more about that. And then as we all love sitting on the sofa with our families at Christmas, we're going to have a look at what the future of Gringotts’s Bank from the Harry Potter series might look like. And the latest release in our virtual world is called the Christmas Quantum Safe. So a new edition, new release. So get ready with your popcorn. We're going to talk about that. And we will try and remember at the end to loop back to what all this means on the future of investing and wealth management. With that, let's get into it. We hear the word quantum everywhere. But actually, John, what does it actually mean? Because I have no clue!

00:03:03:00 - 00:03:30:00
John Pullar-Strecker
Good question, Jane. So when we're talking about quantum, we're talking about the rules that tiny things that we can't see, like atoms and subatomic particles, follow. And these are rules that are very different from the rules we see in everyday life, which are explained by classical physics. So, as for example, gravity. Quantum is different, things get weird at this super small scale.

00:03:30:00 - 00:03:47:00
Jane Parry
Definitely weird and wonderful world. So if we can't see quantum, how do we know it's real? So I touched on Christmas Robins. Perhaps you can explain how quantum exists in nature and guides the robins’ migration.

00:03:47:00 - 00:04:10:00
John Pullar-Strecker
Well, I'll try. So many migratory birds, including robins, can sense the Earth's magnetic field. Obviously, they can't carry a compass, they don't have pockets, but they rely on a quantum effect in their eyes. So robins have light sensitive proteins called cryptochromes.

00:04:10:00 - 00:04:12:00
Jane Parry
Cryptochromes.

00:04:12:00 - 00:04:35:00
John Pullar-Strecker
In their retinas, so it's in their eye. Light hits the cryptochromes and that creates what are called entangled electrons. So those are electrons that are connected and this in turn reacts with the Earth's magnetic field. So they're effectively connected to the Earth's magnetic field, which helps them to fly because they send signals back into -

00:04:35:00 - 00:04:37:00
Jane Parry
So they know which direction to fly in.

00:04:37:00 - 00:04:44:00
John Pullar-Strecker
Absolutely. So it's like it's like a compass effect. And that's called quantum entanglement.

00:04:44:00 - 00:04:52:00
Jane Parry
Quantum entanglement. OK, what other things go on in the natural world?

00:04:52:00 - 00:05:19:00
John Pullar-Strecker
And these are all things that have been, you know, proven, by bosses and scientists. So plants catching sunlight, the energy from the sun, it tries to find all of the pathways it can to find the fastest way to the plants cell. And it does that, it explores it all at once, all at the same time. And that's called quantum coherence.

00:05:19:00 - 00:05:21:00
Jane Parry
Quantum coherence, OK.

00:05:21:00 - 00:05:42:00
John Pullar-Strecker
And then thirdly, the sense of smell. It's one of the strongest things that we have as human beings. And one of the reasons that we can smell things so quickly because that alerts us to danger, for example, is that molecules can jump across barriers in your nose, letting you smell things faster. And that's called quantum tunnelling.

00:05:42:00 - 00:05:48:00
Jane Parry
Quantum tunnelling. I feel like I'm repeating you all the way through this. All these new words you've never heard of before.

00:05:48:00 - 00:06:04:00
John Pullar-Strecker
So imagine we're sitting here with a wall between us. The effects of quantum are such that the particle could go through the wall, without damaging it, to you. And that's just one of the amazing things about quantum in small scale.

00:06:04:00 - 00:06:52:00
Jane Parry
I'm definitely having my mind blown today, John. Right, OK, I'm going to go now, in this magical world that we're now in, to Harry Potter. And we talked about the latest virtual release of Harry Potter courtesy of Canaccord Wealth and Gringotts Bank. The latest release being called the Christmas Quantum Safe. If everybody could imagine, Gringotts bank meets quantum physics and it's got a safe down in the dungeon. What makes this safe, unbreakable, and how do these elements of quantum, quantum computing, quantum rules make the safe so impenetrable that no one can break into it?

00:06:52:00 - 00:07:49:00
John Pullar-Strecker
I'll try. So this is an imaginary safe in the future. So if we think about this safe having four dials, they're all spinning. So they're not ordinary metal dials. They all behave in different ways. So dial one, you look at it, it's spinning really, really fast. So it's going through all the numbers, but you can't stop it. The only way of finding out what it is, is to press on it, at which point it becomes a number. But if it's not the combination of the safe, then it's the wrong number. And only by having that combination and knowing what it is will you be able to open the safe. The problem is once you stop, once you press that button, and it's in one place, it can't spin again. So, the safe would be unopenable. 

00:07:49:00 - 00:07:50:00
Jane Parry
And that's only dial one of four.

00:07:50:00 - 00:07:54:00
John Pullar-Strecker
And that illustrates superposition.

00:07:54:00 - 00:07:57:00
Jane Parry
Superposition, quantum superposition. OK, I got it.

00:07:57:00 - 00:08:37:00
John Pullar-Strecker
So, the second dial is called the entanglement dial. Turning the style instantly affects a matching dial inside the secure vault, even if they're separated. If somebody tries to tamper with that dial, the internal one reacts immediately. It's instant. And so, like having a pair of magical twin dials, change one and the other one shifts and you break the link and the whole safe locks down. So you have a tamper proof safe. Any attacker touching this dial would just leave a detectable fingerprint in the quantum state.

00:08:37:00 - 00:08:40:00
Jane Parry
And they can't open the safe.

00:08:40:00 - 00:08:42:00
John Pullar-Strecker
And they can't open it, and you know that they've tried to open it.

00:08:42:00 - 00:08:43:00
Jane Parry
Because the fingerprints on it.

00:08:43:00 - 00:08:47:00
John Pullar-Strecker
Exactly.

00:08:47:00 - 00:08:50:00
Jane Parry
OK, that’s the entanglement dial two, what’s dial three?

00:08:50:00 - 00:09:29:00
John Pullar-Strecker
Dial three is the no copy dial. So, this dial has a rule. Its current state cannot be copied. So if a thief tries to, let's say, record its position, photograph it, clone it, the dial scrambles itself automatically. This is because quantum information, it refuses to be duplicated, which means that no one in the middle, let's say at a cash point, looking at your number, no one in the middle can attack it. So it's a dial, if you think about it, that it erases itself the moment that somebody tries to take a peek. So it's gone.

00:09:29:00 - 00:09:32:00
Jane Parry
So definitely, that one's definitely a magic dial.

00:09:32:00 - 00:09:35:00
John Pullar-Strecker
Yeah, it's definitely Harry Potter.

00:09:35:00 - 00:09:36:00
Jane Parry
And he's got a cloak on.

00:09:36:00 - 00:09:38:00
John Pullar-Strecker
Absolutely.

00:09:39:00 - 00:09:39:00
Jane Parry
Right, dial four.

00:09:39:00 - 00:10:33:00
John Pullar-Strecker
And a wand won't open it. Dial four is the randomness dial. So, this one doesn't spin according to software or patterns, if you think about making codes. It spins, it uses quantum randomness and that's the kind that is impenetrable for any algorithm or attacker. It's completely random. So when the safe needs a new code, it generates numbers that are pure. You can't guess it, it's unguessable from nature. So there are four different ways of securing this code. So you have a safe that sits in many states at once. It signals instantly if you try open it. It can't be copied or intercepted and it's random.

00:10:33:00 - 00:10:48:00
Jane Parry
OK, I'm liking this new Harry Potter magical movie. OK, so just bring us back down to earth then. Perhaps we'd get off our broomsticks and stop playing Quidditch. What is the relevance of all of this to investing and wealth management then?

00:10:48:00 - 00:11:25:00
John Pullar-Strecker
It's the power of quantum computing, Jane. And this is something that Sundar Pichai at Google knows really well. If you think about deep mind and creative, we're the first creators of generative, of AI and this is something that they're working on with their quantum computer. But it can be very good at certain things, not everything, but certain things. So, for example, cryptography as we've seen with our safe, both in terms of breaking codes, but also creating codes to make sure that things are safe.

00:11:25:00 - 00:11:29:00
Jane Parry
So, in this sort of cybersecurity world, it could have useful applications there.

00:11:29:00 - 00:11:37:00
John Pullar-Strecker
Cybersecurity, think about weapons, think about communications that we that we don't want other people to hear.

00:11:37:00 - 00:11:44:00
Jane Parry
So you can protect your data, your intelligence behind these security walls, behind these 4 dials.

00:11:44:00 - 00:11:50:00
John Pullar-Strecker
Exactly, with securities that you can't break, unless you have the code.

00:11:50:00 - 00:11:53:00
Jane Parry
Or unless you have an even more powerful quantum computer, I guess.

00:11:53:00 - 00:12:37:00
John Pullar-Strecker
True. Secondly, and I think this is where things again get really exciting in terms of medicine, in terms of our understanding of illnesses. The quantum systems, the way that they work, they're unbelievably powerful because they can look, say, at molecules and how they might react. And there might be a whole number of different possibilities and they can actually try and look at those and quantify those at once, all of these possibilities at once. Whereas classical computers and scientists, they can only look at the molecules one at a time. What worked, what didn't work, what's good in combination, this will speed things up.

00:12:37:00 - 00:12:43:00
Jane Parry
So it could revolutionise drug discovery or material science or that sort of thing.

00:12:43:00 - 00:12:59:00
John Pullar-Strecker
Absolutely correct. It's been making some things that you just can't do with classical computers. I mean, these are problems that might take millions of years for computers to solve that quantum computers can actually solve in minutes.

00:12:59:00 - 00:13:00:00
Jane Parry
Wow.

00:13:00:00 - 00:13:02:00
John Pullar-Strecker
Potentially.

00:13:03:00 - 00:13:05:00
Jane Parry
It's looking good for my old age then John.

00:13:05:00 - 00:13:24:00
John Pullar-Strecker
Well, I mean hopefully much sooner than that. Potentially in the next five to ten years. I mean, the work that's been done at the moment, it's still early stages, but there are lots of companies working on this. It's going to be exciting.

00:13:24:00 - 00:13:26:00
Jane Parry
Any other applications?

00:13:26:00 - 00:13:47:00
John Pullar-Strecker
I mean, there are supply chains, traffic. I mean, an obvious other area would be financial portfolios. So, you know, being able to sort of analyse lots of data together and let's say look at multiple possibilities, but looking at them all at the same time. And that's the power of quantum computing.

00:13:47:00 - 00:14:23:00
Jane Parry
Blimey, so I better look what's in my takeaway coffee cup today because it's overflowing. It's absolutely overflowing today. Thank you so much for taking us on this tour of the wonderful world of Quantum. I'm not sure I've quite got my head around it all. I quite like the little robin bob bob bobbin, bob bob bobbin along, proving that quantum is real in nature. I like the story of the quantum Christmas safe and the four dials. I'm imagining myself in Gringotts basement looking at that safe right now.

00:14:23:00 - 00:14:27:00
John Pullar-Strecker
Hopefully one day available on Amazon.

00:14:27:00 - 00:14:44:00
Jane Parry
Yeah, maybe. And just thinking about how this technology is going to advance the world going forward, in equal measure optimistic and scared I guess, but looking forward to the Christmas future that this might bring.

00:14:44:00 - 00:15:02:00
John Pullar-Strecker
It’s using nature, which you know, we're all part of, to actually develop computers that can help us understand more about the world, about us, about space, about how black holes are created. Very exciting.

00:15:02:00 - 00:15:21:00
Jane Parry
And I think you mentioned another podcast to me, which is Quantum 101. So anyone who is interested in learning more about this, if you want to have your brain blown a little bit, please do check that out. Thank you again, John, for your time. Wishing you a happy Christmas and a prosperous 2026.

00:15:21:00 - 00:15:25:00
John Pullar-Strecker
And the same to you, Jane. Happy Christmas and have a wonderful 2026.

00:15:25:00 - 00:15:26:00
Jane Parry
Thank you very much.

00:15:26:00 - 00:15:27:00
John Pullar-Strecker
Bye.

00:15:27:00 - 00:15:28:00
Jane Parry
Bye.

00:15:28:00
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 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 - 00:00:51:00
Jane Parry
Hello, and welcome to the Canaccord Coffee Break podcast. I'm delighted to be joined today by John Pullar-Strecker, who is a research analyst in our Chief Investment Office. And we are here for a Christmas special, one of two Christmas specials, in fact. So for those who don't know me, I'm Jane Parry. I'm the Chief Marketing Officer here at Canaccord Wealth and the idea of the podcast is to give you a little bit of bite-sized market insight in just under 10 minutes. And if you like what you're hearing, don't forget to hit follow on Spotify or Apple and you will never miss an episode. So, John, welcome on board.

00:00:51:00 - 00:00:54:00
John Pullar-Strecker
Hi Jane, thank you. Great to be here again.

00:00:54:00 - 00:01:03:00
Jane Parry
Thank you for coming back. So when you were with me last, well a month or so ago, you touched on the subject of pet diagnostics.

00:01:03:00
John Pullar-Strecker
We did.

00:01:04:00 - 00:01:35:00
Jane Parry
And I said, oh, that sounds interesting, come back and tell me a bit more about that. So here we are. And the theme of today's podcast is a dog is for life, not just for Christmas. And it's all about what we are doing to invest in pet health. So first off, I wanted to have a look at the macro picture and why there's demand for investing in pet health and how that might change in the future. And I know that that's something you're sort of deeply involved in researching on behalf of clients and investors.

00:01:35:00
John Pullar-Strecker
Indeed.

00:01:36:00 - 00:01:51:00
Jane Parry
So I think, well, from what we see in the UK, lots of people have pets and there are lots of pets, dogs and cats in the world. So perhaps you could just start off by giving us a bit of a sense of the scale of pet ownership in the Western world.

00:01:51:00 - 00:02:18:00
John Pullar-Strecker
Yeah, absolutely, and great to be talking about this. Pets - dogs, cats, there are obviously other pets (gerbils and snakes and other pets that people like to keep) - but there are roughly in US and Europe combined, so this is just US and Europe and not the rest of the world, around 180 million dogs and 203 million cats.

00:02:18:00
Jane Parry
That is a lot of cats and dogs.

00:02:20:00
John Pullar-Strecker
That is a lot.

00:02:21:00
Jane Parry
Raining cats and dogs.

00:02:22:00 - 00:02:39:00
John Pullar-Strecker
Indeed, and it's because we love our pets and we try to look after them. But just to give you some kind of scale, there's an average of about half a pet, that's either dogs or cats or gerbils or snakes, for every person in the Western world. So it's a lot of pets to look after.

00:02:40:00 - 00:02:52:00
Jane Parry
My mean husband won't let me have a dog. Anyway, never mind, that's another subject. So what are the pressures that pet owners face today, and how have these changed, perhaps over the last few years?

00:02:52:00 - 00:04:01:00
John Pullar-Strecker
I think there are a number of pressures that owners have. I mean one of those, and most obvious is insurance costs. They never seem to go down. They always seem to go up, roughly in the region of, in the UK, of £11 to £14 a month, which is not affordable for every dog owner. And that's one of the reasons why only around 50% of pets are insured. There's a second one and this is just a sort of cost of living. Again, pet food never seems to go down in price. It only goes up and we want to give our pets the best food and the healthiest food that we can. During the cost-of-living crisis, if we think particularly sort of during COVID and after when prices were going up, according to animal charities about 770,000 owners were actually cutting back on essentials, including potentially skipping meals to afford both the food and vet care.

00:04:01:00 - 00:04:05:00
Jane Parry
Oh, so they were putting their pets ahead of themselves?

00:04:05:00 - 00:04:39:00
John Pullar-Strecker
Absolutely. And this is one of the features about pets. You know, we love our pets. They're very important to us and we want to look after them, but it's expensive. And then the third problem, and this is partly again, through COVID burnout, is that we have fewer and fewer veterinarians, vets, as we call them. And it takes an awful long time to qualify. So in the UK takes five to six years and in the US seven to eight years.

00:04:39:00
Jane Parry
To qualify to be a vet?

00:04:40:00 - 00:04:45:00
John Pullar-Strecker
Absolutely, which is an awful long time. I mean, in some cases even more than a human doctor.

00:04:45:00
Jane Parry
Woof!

00:04:46:00
John Pullar-Strecker
Was that woof?

00:04:47:00 - 00:04:50:00
Jane Parry
Hey, it was a woof, woof!

00:04:50:00 - 00:05:12:00
John Pullar-Strecker
Absolutely. I mean, and this is the problem. So you have vet practices where vets are becoming older, they're wanting perhaps to retire. And, you know, there's just a shortage, which means a shortage of visits available, shortages of appointments. And, you know, that leads to a, you know, tougher situation in terms of treating our pets.

00:05:12:00 - 00:05:34:00
Jane Parry
So let's loop back to sort of the theme of today and investing in pet diagnostics and why is that important for both pet owners and for vets offering those services? And I guess how does that help them create capacity when there's a shortage of vets or speed up their service and save costs for pet owners?

00:05:34:00 - 00:05:47:00
John Pullar-Strecker
It’s a hugely important part. We need to have more diagnostic products, not least because our pets can't tell us what the problem is. We don't always know what the problem is.

00:05:47:00 - 00:05:50:00
Jane Parry
We don't read Woof, do we. Or meow.

00:05:50:00 - 00:06:39:00
John Pullar-Strecker
But we don't always know what problems we have, but you know, we may be able to help doctors along those lines. It's more difficult, unless it's obvious, it's just much more difficult for vets. So they need a variety of tools. And these are sort of diagnostic products and services. So one company that we know serves customers in over 175 countries. It's a leader in the global sphere and it provides all kinds of different products, including in-clinic analysers, because if you can analyse what's wrong with your pet in the clinic, it saves taking lots of test tubes and fluids.

00:06:39:00
Jane Parry
And sending that off to a lab.

00:06:40:00 - 00:06:48:00
John Pullar-Strecker
Sending it off to a lab and getting it back and you know, it wasn't this, maybe it's that. So the more that you can do in the lab -

00:06:48:00 - 00:06:50:00
Jane Parry
Or in the vet surgery sort of thing.

00:06:50:00 - 00:07:07:00
John Pullar-Strecker
Exactly. The faster it happens, hopefully it means less cost, although you know, this is still early stages from that perspective and our pets can be treated more quickly and effectively. So these are the kind of tools that are required.

00:07:07:00 - 00:07:13:00
Jane Parry
So what other sort of tools, diagnostic developments, are coming along the line then?

00:07:13:00 - 00:07:39:00
John Pullar-Strecker
So at the moment the in-house products can treat two different areas really - blood morphology and haematology. They can look at red blood cells and white blood cells and platelets and that obviously gives you a huge amount of information. They can look at ear cytology.

00:07:39:00 - 00:07:41:00
Jane Parry
Yeah, animals always seem to have ear problems, don't they?

00:07:41:00 - 00:08:06:00
John Pullar-Strecker
Yes. I mean, probably a bit more dogs than cats because they tend to go, you know, roaming around fields and picking up seeds and that kind of thing. Cats probably slightly less, but it's important for both. In the future, it's going to involve products that would enable vets, hopefully in house, to be able to look at, say, lumps where there might be tumours.

00:08:06:00
Jane Parry
Bumps and lumps.

00:08:07:00 - 00:08:18:00
John Pullar-Strecker
Absolutely. Which, you know, oncology is again, a huge part and the speed at which you can sort of take these tests and find out what's wrong is very important.

00:08:18:00 – 00:08:45:00
Jane Parry
Interesting. So I can see that there's advantages for both pet owners, speed costs, but also for people running vet practices, they can do it in-house, they can turn that around more quickly. So workflow time, efficiency gains, taking advantage of all that tech, but what about our clients or investors and client portfolios? How does this play back into to that? Because ultimately that's what we're about, isn't it, in wealth management?

00:08:45:00 - 00:08:57:00
John Pullar-Strecker
Absolutely. So I think it's a number of ways, if you can find companies that have a large amount of recurring revenue as part of their models and -

00:08:57:00 - 00:09:01:00
Jane Parry
This is companies who are developing this diagnostic tech you're talking about?

00:09:01:00 - 00:09:19:00
John Pullar-Strecker
Absolutely, because along with the diagnostic equipment, there are consumables, there may be test arrays, there's software. All of these things are expenses, costs, but they're absolutely essential, as they are with human medicine.

00:09:19:00 - 00:09:28:00
Jane Parry
But we've already established right at the beginning what a huge, what, half a pet per person in the Western world? So there's a huge amount of pets there that need treating.

00:09:28:00 - 00:09:52:00
John Pullar-Strecker
There's a huge amount of pets that need treating and quite often they get treated sort of too late. But for these companies, if 80%, or maybe even more of your revenue is from consumables, once you've put one of these pieces of kit inside a vet, then that's recurring revenue and that's a very strong business model.

00:09:52:00 - 00:09:54:00
Jane Parry
That's the sort of thing we're looking for as investors.

00:09:54:00 - 00:10:01:00
John Pullar-Strecker
Absolutely. And the way that I look at this kind of stocks is, as a pet owner myself, we have a dog and a cat - 

00:10:01:00 - 00:10:03:00
Jane Parry
Oh, don't tell me that, don't tell me.

00:10:03:00 - 00:10:30:00
John Pullar-Strecker
And they fight, playfully, I should say, rather than aggressively. But you know, it's essential that we have these kinds of tools. But investing in these kinds of companies, I see it as one of the ways to trade off the insurance and the cost that we have, which always seem to go up. So you know, if you can perhaps invest in these and make a bit of money as well, it's a little bit of an offset against some of the costs that that we take.

00:10:03:00 - 00:11:30:00
Jane Parry 
Thank you. Oh, well, thank you for your time today. Really interesting. I think I just need to sum up what's in my takeaway coffee cup today. So as we've established, there are a lot of pets in the world who get poorly from time to time. So anything we can do to help fast track getting them better is a good thing to do, we reckon. And actually, people would go hungry before their pet, which is interesting. And sadly, pets can't tell us what's wrong with them. So tools that give us much more diagnostic capabilities will move the needle in everyday veterinary practices to speed up looking after the animal. But we do have this vet bottleneck. So again, anything we can do to support vets to get through more patients more quickly, is going to be a good thing. And from an investment perspective, the market is huge and growing and if we can help invest in some of the technology that supports this, then win, win, win.

00:11:30:00 - 00:11:45:00
John Pullar-Strecker
Exactly, and I mean that's perfect. I mean perfect summing up, you know, we're helping the vets become more productive. We're hopefully getting treatment for our pets more quickly and more effectively and diagnosing what's wrong and that's a win win.

00:11:45:00
Jane Parry
Thank you very much. Thank you for your time.

00:11:47:00
John Pullar-Strecker
You're most welcome. Have a lovely Christmas. 

00:11:49:00
Jane Parry
Happy Christmas to you too.

00:11:51:00
John Pullar-Strecker
Happy Christmas, Jane.

00:11:52:00
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.

00:00:10:16 - 00:00:33:19
Jane Parry
Hello, and welcome to the Canaccord Coffee Break podcast. This is our last regular weekly podcast of 2025. How quickly we've come to the end of the year. And as usual, I'm delighted to be joined by Tom Hibbert from our Chief Investment Office and also delighted to let everybody know that Tom is now our Chief Investment Strategist. So congratulations!

00:00:35:02 - 00:00:36:23
Tom Hibbert 
Thank you, Jane. Yeah, it’s great.

00:00:36:24 - 00:01:14:18
Jane Parry
Well, welcome. I'm sure it's all to do with the podcast that’s elevated you. Anyway, welcome to our bite-sized market insight, hopefully in just under ten minutes. And if you like what you're hearing, please don't forget to hit follow on Spotify or Apple and you will never miss an episode. So, grab your coffee and listen in, and let's get into what's been happening in the last week or so in the markets. And it feels, Tom, like the end of the year has followed pretty much the same theme of all of 2025, and maybe we are ending the year with more questions than answers, but hopefully you can give us some answers today.

00:01:14:18 - 00:01:15:22
Tom Hibbert
We’ll see, I don’t know about that.

00:01:15:24 - 00:01:50:21
Jane Parry
So, the US equities briefly reached new highs following the Federal Reserve (the Fed's) latest interest rate cut. But those gains faded away with renewed scrutiny on tech valuations which weighed heavily on sentiment. And that's something we've been talking about over the last few months really. And last week we also talked about the possibility of a Santa rally. But his sleigh does seem to have got stuck drifting sideways in a bit of a snow drift this week. So perhaps, Tom, you can give us a brief summary. What's been going on in the last week or so?

00:01:51:00 - 00:02:43:10
Tom Hibbert
Okay. And I suppose there hasn't been a clear trend in equity markets. And the main reason for that is this week is a very busy week of central bank meetings. We've got the Bank of England, we've got the Bank of Japan, but also, we've got a load of key economic data, labour market data, inflation data in the US, which because we've had a government shutdown, we haven't had any official data for a few months. And now we're getting a whole load of data for the last few months. So it's a key week where I think investors are looking for that data first. And there hasn't been a clear trend, ahead of that data. So last week, no clear trend, but a little bit of weakness in, you know, in the tech sector and some of the AI names, but broadly still positive sentiments and good performance from other sectors, other cyclical sectors, financials, industrials, materials, all performing quite well.

00:02:43:10 - 00:03:23:04
Jane Parry
So, no wind down in the run up to Christmas then. But the Fed did give us a little Christmas present by way of a rate cut. But I think you said in this week's weekly markets review that there was a more significant announcement in that quantitative tightening will formally conclude. I just wanted to get into that a little bit more and understand what that really means. I know we were all really familiar with quantitative easing in the past, and that was part of our vocabulary for a long time. But perhaps you could just tell us what's the difference between quantitative tightening and quantitative easing and then perhaps go on to what's happening now with the Fed.

00:03:23:06 - 00:04:02:20
Tom Hibbert
A very simplistic analogy would be the Fed is a bit like the driver of the car, which is the US economy, and they have some tools to press their foot on the accelerator and they have some tools to press their foot on the brake. When they're doing QE, which they did largely after the after the global financial crisis for a long time and during the Covid pandemic, they have their foot on the accelerator. That’s quantitative easing. And that is when they buy bonds and replace them with liquid cash. So they're injecting cash into the financial system. Quantitative tightening is when they've got their foot on the brake and they've had their foot on the brakes during the recent inflation spike that we've had. So they've been doing quantitative tightening. 

00:04:02:20 - 00:04:04:14
Jane Parry
Which means they are selling bonds.

00:04:04:14 - 00:04:13:11
Tom Hibbert
They’re selling the bonds back into the market that they previously bought during QE. And actually, the bonds mature naturally. So they're just sort of rolling off their balance sheet.

00:04:13:11 - 00:04:15:00
Jane Parry
Okay, and that's the foot on the brake?

00:04:15:02 - 00:04:35:24
Tom Hibbert
That's the foot on the brake. So now what they've announced is they can't actually really take their foot off the brake fully because the bonds are maturing naturally. So they have to put their foot on the accelerator at sort of the same rate. So what they're doing now in this new neutral regime is they're putting their foot on the accelerator to the same degree that their foot is on the brake, if that makes sense.

00:04:36:01 - 00:04:36:22
Jane Parry
Dancing on the pedals.

00:04:36:22 - 00:05:01:02
Tom Hibbert
And they're doing it now slightly for technical reasons as well. So they're providing some liquidity, to ease some light stresses in the short-term funding markets. So that's just another reason why they're doing it now. But at the margins, well actually not even at the margins, it should provide some good support for markets in the short term because they're moving from a hawkish stance at a restrictive stance to one that's more neutral.

00:05:01:02 - 00:05:18:00
Jane Parry
The other interesting thing I think that came out last week was the US administration's national security strategy, which I think they released on Thursday. Do you want to just touch on that and how that is going to impact the markets and what our clients and investors should be thinking?

00:05:18:00 - 00:06:04:16
Tom Hibbert
Yeah, absolutely. And I mean, I'm someone who reads these things, and this one was a better one to read than previous ones because it was much shorter. And it didn't seem to just tie in every single sort of current event. It was quite concise and quite targeted. You also need to be a bit careful with these things, because you need to make sure that you're not being political and you're focusing on the economic impact. And actually, with this one, it's very easy because it's so clear. It comes across so clearly how the national security strategy is so centred on the US economy and their economic strategy. So, what stands out is how explicitly economics, productivity and technology are framed as central pillars of national security.

00:06:04:16 - 00:06:05:17
Jane Parry
Okay.

00:06:05:17 - 00:06:14:00
Tom Hibbert
So technology leadership, particularly in AI and quantum computing, interestingly, advanced manufacturing and domestic advanced manufacturing.

00:06:14:00 - 00:06:15:00
Jane Parry
In the US.

00:06:15:00 - 00:07:16:14
Tom Hibbert
In the US, exactly. Central to national security strategy, but not merely a race between companies, but also a race between the great powers, between China and the US. So they're on this race to general intelligence too, and it shows how the administration sees economic strength as the foundation of national power. And it explains why, you know, the US government is so keen to keep the fiscal taps open, to keep this cycle pumping, to keep the AI, growth race driving, driving economic growth, growth and productivity. So, it has vast implications for the economy. It was just an interesting, unusually interesting document and it sort of reflects, I suppose, the end of this era of globalisation, in a way. We're now in a multipolar world with great powers who have their spheres of influence. The US is, you know, they’re very aware of that. And I think that comes across very strongly in the document.

00:07:16:14 - 00:08:12:11
Jane Parry
Interesting. Well, thank you very much for your time. And let me just have a quick look what's in my takeaway coffee cup today. So, while cutting interest rates, the Fed has given us a little bit of a Christmas present, but has resulted in Santa drifting slightly sideways in the snowdrift this week rather than any sort of Santa rally for the end of the year. We've talked about how the strategic arms race between the powers, most notably the US and China, is significantly impacting economic policy, fiscal policy, productivity, technology, which are framed as central pillars of the US national security strategy. And how that might be used productively to create technology leadership, particularly in AI, in quantum computing and in advanced manufacturing. So interesting times.

00:08:12:11 - 00:08:13:22
Tom Hibbert
Absolutely.

00:08:13:22 - 00:08:58:00
Jane Parry
That whole quantum computing aspect, really interesting. And actually, I've got a Christmas special podcast with John Pullar Strecker, your colleague from the Chief Investment Office, talking a little bit more about that and he slightly blew my mind, if I'm totally honest, Tom. But, looking forward to getting that one out. And also, we've got another Christmas special about why a dog is for life, not just for Christmas. Also with John, looking at innovative pet diagnostics. And I would just say investing isn't just for Christmas. That's for all year round as well. So, I do hope you've enjoyed the first few months of our podcast. Our regular weekly podcast will be back in the new year, probably week beginning the 12th of January.

00:08:58:00 - 00:09:01:00
Tom Hibbert
Thank you for listening everyone.

00:09:01:01 - 00:09:05:16
Jane Parry
And happy Christmas and here's to a prosperous 2026.

00:09:05:16 - 00:09:30:00
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.

00:00:10:13 - 00:00:22:10
Jane Parry
Hello 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 today by Tom Hibbert from our Chief Investment Office.

00:00:22:11 - 00:00:23:19
Tom Hibbert 
Hello, Jane. Hi, everyone.

00:00:23:20 - 00:00:44:08
Jane Parry
Morning. So, for our regular listeners, you will know this is a bite-sized market insight in just under ten minutes. Hopefully, if we keep time. And if you like what you're hearing, please don't forget to hit follow on Spotify or Apple and you will never miss an episode. So welcome to this week's Canaccord coffee break. Grab your coffee. And after all the commentary in the last couple of weeks about the UK budget, we are going to go back to what's happening in the markets.

00:00:52:19 - 00:00:53:09
Tom Hibbert
Yeah.

00:00:53:11 - 00:01:07:17
Jane Parry
And shift our focus towards the central banks in particular. This week, Tom, we are going to jump into our Santa's sleigh and quickly travel around the world visiting the US, the UK and Japan.

00:01:07:20 - 00:01:08:16
Tom Hibbert
Let's do it.

00:01:08:18 - 00:01:21:24
Jane Parry
Let's do it. Ho ho ho. And we're going to ask the question, are the markets set up for a Santa rally? So first off, could you just briefly summarise where the markets are at the moment? It feels quite quiet to me.

00:01:22:01 - 00:01:37:21
Tom Hibbert
Yeah I mean so it has been quiet. We saw a little bit of weakness in the first half of November, followed by quite a strong recovery into December. So a bit of a sort of Santa rally at the end of November, if you like. Last week, equity markets were more sort of rangebound. 

00:01:37:21 - 00:01:38:19
Jane Parry
Rangebound.

00:01:38:19 - 00:01:41:06
Tom Hibbert
Yeah, no clear trend, actually.

00:01:41:06 - 00:01:42:24
Jane Parry
So not meaningfully up or down.

00:01:43:00 - 00:02:06:07
Tom Hibbert
Exactly. But still positive sentiment that has driven markets since April. Yeah, still very much there. So that hasn't faded. I think that was just a bit of lack of trend before these major central bank meetings starting this week with the Fed. And then next week we've got the Bank of England (BoE) and the Bank of Japan (BoJ). I expect positive outcomes from those meetings, particularly from the Fed and the BoE.

00:02:06:07 - 00:02:16:22
Tom Hibbert
So jumping into that, but that should set the scene along with all of the other positive things that people are talking about for a bit of a Santa rally. So hopefully, we'll see.

00:02:16:24 - 00:02:29:18
Jane Parry
So let's jump in our sleigh then and go off to the US. Yeah. So the US Federal Reserve, the Fed is due to meet this week. What are you expecting to hear from the Fed.

00:02:29:20 - 00:02:55:06
Tom Hibbert
So we expect them to cut interest rates this week. You know, there was some uncertainty about that previously, but that looks more and more likely as time has passed. So really do expect an interest rate cost. The interesting thing for the Fed at the moment is that they're cutting interest rates into a very strong, economic situation. The US economy has been really very, very strong. It's growing at sort of roughly 7% nominal growth rates.

00:02:55:12 - 00:02:56:11
Jane Parry
We'd love that here, wouldn't we?

00:02:56:11 - 00:03:27:21
Tom Hibbert
We really would. I mean, look at the different factors of what's driving that. You know, that's a very positive fiscal backdrop. Deregulation. Governments are spending a lot of money. You've got a positive monetary policy backdrop as well, with interest rate cuts coming, and the Fed sort of looking at injecting a bit more liquidity as well into the market through, what they call balance sheet maintenance, which we’re getting a bit technical, but that should provide some liquidity in December and early next year as well, which should be another positive tailwind.

00:03:27:21 - 00:03:30:19
Tom Hibbert
And then you have things like just surging AI related capex

00:03:30:19 - 00:03:32:12
Jane Parry
Yeah. Which we've talked about as well.

00:03:32:12 - 00:03:53:19
Tom Hibbert
Yeah, very strong corporate landscape. So while that sort of backdrop reinforces the sort of US led market strength that we've seen, the Fed is cutting interest rates really because of what people describe as a K-shaped economy. So in aggregate the economy's been very strong. But it's also quite narrow. I mean all those things are quite narrow. The stock market's been very strong, but again, that's quite narrow. Some areas are struggling so.

00:04:00:21 - 00:04:02:01
Jane Parry
Like what sort of things.

00:04:02:07 - 00:04:04:24
Tom Hibbert
So lower income consumers are struggling.

00:04:04:24 - 00:04:05:05
Jane Parry
Yeah.

00:04:05:10 - 00:04:25:10
Tom Hibbert
You know the debt costs are high. Interest rates are high. There's been a lot of inflation. We've just come off the back of a period of high inflation, which has eroded some of that purchasing power. You see weakness in some of the more cyclical and interest rate sensitive parts of the economy. So smaller companies, which tend to pay more for housing rate debt, the housing market is a bit stale. There's not you know, people are wanting to move houses, mortgage rates are still quite high. And then you've got manufacturing, manufacturing output and activity. It's been quite slow as well on the back of this sort of high-interest rate environment. So yes, I expect the Fed to cut rates, to ease the pressure off those areas. But they're easing into a place of quite aggregate strength, quite a hot economy, which I think does raise a few questions about the longer-term policy outlook and the market's expectations for more interest rate cuts in 2026, and what that means, I think, for inflation looking further out.

00:05:01:13 - 00:05:06:07
Jane Parry
And I heard there was speculation of a new Fed chair, Kevin Hassett.

00:05:06:11 - 00:05:19:21
Tom Hibbert
Yes. So good question. It's worth pointing that out because you look at the market odds, and Kevin Hassett, he's emerged as the clear favourite to replace Jerome Powell. And that has you know had some market impact. It’s an interesting discussion. So people are sort of focused on his reputation as a dove.

00:05:28:23 - 00:05:30:17
Jane Parry
A dove, tell me what a dove is.

00:05:30:17 - 00:05:35:22
Tom Hibbert
A dove is someone who's a proponent of lowering interest rates. 

00:05:35:22 - 00:05:36:19
Jane Parry
Yeah.

00:05:36:21 - 00:05:37:18
Tom Hibbert
More stimulative monitoring policy

00:05:37:18 - 00:05:42:16
Jane Parry
So supporting what you've just been talking about and what we expect the Fed to do in the next week or so

00:05:42:16 - 00:06:10:08
Tom Hibbert
And he's aligned with MAGA as well. He's more of a Maga guy. So there's this alignment with the US administration which has also raised a few concerns about whether his appointment would erode some of the Fed's independence. You know, I think actually, although there is obviously this blurring of the lines between the Fed and the US administration, that line blurred quite a long time ago. And what we're seeing now is that the US administration is quite keen for just more normal policy tools. So as well as, you know, the questions around dependence or the independence of the Fed, I think actually we could just be seeing a reversion back to more normal monitoring policy. I think that's almost underappreciated by the market at the moment

00:06:30:12 - 00:06:43:16
Jane Parry
Okay. It will be interesting to see how that plays out then over the next few months. So, can we jump back in our sleigh and come back to the UK? The BoE is also due to meet in the next week. What are you expecting to see there?

00:06:43:18 - 00:06:48:23
Tom Hibbert
So again, expect the BoE to cut rates as well which should be supportive of markets in the UK, should be supportive of the economy. The other thing that we're seeing in the UK that I think supports the BoE in their pursuit of lowering interest rates, is we have started to see more disinflation in the UK, evidence of slowing inflation in the UK, which supports the case for interest rate cuts. At the same time as growth is pretty slow, the BoE does have more room to cut interest rates and it's helped by this disinflationary environment. So the view is now if you look at different measures of inflation, inflation is coming down. I think the BoE is on this pursuit of gradually lowering interest rates. They could do it even more quickly. And at the moment you've got UK government bond yields that are higher than US government bond yields. We could see UK bond yields develop more positive momentum into the year and early next year

00:07:38:22 - 00:07:55:08
Jane Parry
Great, thank you. And finally Japan, hang on we’ve got to get in our sleigh, off we go. Right let’s land in the BoJ. This is an entirely different situation isn't it, compared to the US and the UK. Just tell me a little bit about what's going on there

00:07:55:08 - 00:08:03:10
Tom Hibbert
Yeah, so Japan have had over a decade of very loose monetary policy, negative interest rates. They've had yield curve control where the BoJ has been hoovering up all of the government debt. Japan makes up a huge portion of the global bond market. It's a very big bond market

00:08:15:03 - 00:08:16:00
Jane Parry
Gosh I didn't know that

00:08:16:02 - 00:08:26:16
Tom Hibbert
Yeah. Japan's debt to GDP is 230%. So, it's an indebted nation. And they've really struggled to have any inflation which is why

00:08:26:16 - 00:08:27:15
Jane Parry
Yes, for years and years 

00:08:27:15 - 00:08:59:10
Tom Hibbert
For years. Finally they have some inflation. So the BoJ have been able to slowly start to abandon, cautiously abandon, negative interest rate policy and yield curve control and things like that. And it now looks like the BoJ might, hike rates on in their meeting on the 19th of December. So, you know, the Governor Ueda has come out and said that he's likely to hike rates and the government, which usually put some pressure on the BoJ, has said that they're not going to fight that decision. So the odds of an interest rate hike from Japan this month has increased very sharply in the last week, and we've seen a strong rise in Japanese government bond yields as well. So the ten-year Japanese government bond yield is heading towards sort of the 2% level, which is the highest in almost 20 years since 2007.

00:09:19:05 - 00:09:19:23
Jane Parry
Wow. Okay.

00:09:19:23 - 00:09:28:11
Tom Hibbert
So that has some implications for other bond markets as well, because it makes up such a big portion of the global bond market. It's not as big as the US market

00:09:28:11 - 00:09:32:11
Jane Parry
So how does that work then? How does that impact other bond markets?

00:09:32:11 - 00:09:35:16
Tom Hibbert
I suppose there will be more buyers of Japanese government bonds.

00:09:35:16 - 00:09:42:01
Jane Parry
Because the yields go. So just very briefly then do we think a Santa rally is likely?

00:09:42:03 - 00:09:53:19
Tom Hibbert
Yeah. You know, all of the things that I've mentioned with interest rate cuts incoming, as well as some of the other tailwinds, I wouldn't be surprised if we if we do get a bit of a Santa rally, December tends to be a strong month.

00:09:53:20 - 00:09:54:02
Jane Parry
Okay.

00:09:54:02 - 00:10:07:10
Tom Hibbert
Consumers are spending a lot of money. So there's those existing tailwinds. The one thing that makes me cautious is that it seems to be everyone's base case. Everybody expects a Santa rally. And sometimes, you know, that can be a risk

00:10:07:12 - 00:10:10:10
Jane Parry
Sometimes you don't get everything you want on your Christmas wish list.

00:10:10:13 - 00:10:11:05
Tom Hibbert
That's exactly right

00:10:11:05 - 00:10:32:19
Jane Parry
Brilliant. Thank you very much indeed for your time. So let me quickly sum up what's in my Canaccord coffee cup to take away today. We have focused on central banks this week and asked if cutting interest rates might lead to a Santa rally, as rate cuts often support the equity markets. We talked about doves. We didn't talk about hawks. But the way I can remember the difference between doves and hawks is doves fly low because they like low interest rates. Hawks fly high because I like higher interest rates. 

00:10:44:16 - 00:10:52:02
Tom Hibbert
I suppose the BoE and the Fed are more dovish because they're lowering interest rates. The BoJ has become more hawkish this week

00:10:52:04 - 00:11:06:11
Jane Parry
Yes. And we talked about Japan. And I did not know it was one of the world's largest bond markets. But I do now. And we talked about the US having a K economy, quite narrow but some people at the bottom of the K.

00:11:06:11 - 00:11:10:10
Tom Hibbert
Narrow but very strong. But there are people who are struggling.

00:11:10:10 - 00:11:18:07
Jane Parry
Yeah. So on that note, wishing everybody a very happy Christmas and we'll talk again in the New Year.

00:11:18:09 - 00:11:19:00
Tom Hibbert
Thank you everyone.

00:11:19:00 - 00:11:20:05
Jane Parry
Thank you, thank you.

00:11:20:07 - 00:11:44:24
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.

00:00:09:12 - 00:01:00:00
Jane Parry
Hello 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 welcome you to this week's coffee break with special guest star David Goodfellow, who is our Head of Wealth Planning here at Canaccord. As regular listeners will know, we are usually joined by someone from the Chief Investment Office. And last week, Tom joined us to talk about the market's reaction to the budget. But we thought this week, David, it would be nice to hear from you and have a little think about what our clients and investors should be thinking about and dare I say, doing in light of the recent budget. We don't really want to repeat all that's been in the media about the budget, so I'm hoping you're going to give us your words of wisdom.

00:01:01:00 
David Goodfellow
I'll certainly do my best. 

00:01:03:00
Jane Parry
And years of experience. 

00:01:04:00 – 01:01:05:00
David Goodfellow
Not too many, I don't think. 

Jane Parry
01:01:05:00 – 00:01:36:00
Not too many. Lots of years of experience. Just to add a little bit of value about what people should now be thinking about. So, if you like what you're hearing, don't forget to hit follow on Spotify or Apple and you will never miss an episode. So welcome to this week's coffee break. Grab your coffee, listen in for about the next ten minutes. And let's talk a bit more about budget and financial planning. But first off, the most important question as this is the Canaccord Coffee Break. What is your coffee of choice?

00:01:36:24 - 00:01:45:07
David Goodfellow
My coffee of choice, Jane, is an Americano with a splash of milk. In some coffee houses that is called an Amo with a dash.

00:01:45:09 - 00:02:18:17
Jane Parry
Interesting. An Amo with a dash? Well, we definitely had lots of dashes in the budget last week, particularly dashes of tax and income treatments that we thought might look a little bit modest on the surface, but all together could have a far greater long-term impact on how we save, how we invest, and how we plan. I think it's important that we talk about how our clients and investors could potentially navigate all this. But before we do that, could you briefly summarise the key measures that are impacting individuals?

00:02:18:19 - 00:02:53:00
David Goodfellow
Yeah, I think it's interesting all of those small measures just added up to quite a lot. And just to be clear, we're talking about another tax hike of around about 26 billion pounds on top of the 40 that was raised last year. The tax burden is now reported to be 38% of GDP, and GDP is being downgraded. So, this is meaningful. And inflation is now forecast to remain higher for longer. But it was this, and I'm going to use the overused word now, smorgasbord - I've been using this word for a while…

00:02:53:17 - 00:02:55:00
Jane Parry
You’re claiming that you invented a smorgasbord

00:02:55:15 - 00:03:45:00
David Goodfellow
Well, I didn't invent the smorgasbord obviously, but you know, all these different tax measures, small things to plug this huge black hole, it wasn't quite so huge as we had been led to believe. But I think, you know, we've had a further freezing of the personal tax allowances and NI thresholds - that in itself is expected to raise a further 8 billion pounds by the end of this Parliament. We've had an increase of 2% on interest income, rental income and dividend income. Which seems to be penalising people who are trying to save, trying to do the right thing. And there was talk about everything geared towards growth. And a lot of these things just aren't - they're penalising

00:03:45:00 – 00:03:48:00
Jane Parry
Not supporting investment in growth.

00:03:48:02 - 00:04:10:23
David Goodfellow
You know, one of the measures that wasn't even mentioned in the speech was the fact that tax relief on venture capital trusts is reducing from 30 to 20%. Now, that's one area where people really are trying to create growth. So I think, you know, all of these things are raising money, as we know, to pay for some big welfare increases.

00:04:10:23 - 00:04:24:15
Jane Parry
Yeah. The triple lock's been left in place. We seem to be paying more to support welfare. Also, the surcharge on houses worth more than 2 million pounds. Did you get any feedback from clients on that? 

00:04:24:15 – 00:04:51:00
David Goodfellow
Actually, for our clients with more valuable properties, I think it was a bit of a sigh of relief. That for the really, really valuable properties, it was being capped out at around about 7500 pounds per annum. But yeah, it had been, you know, that was probably one of the biggest kites that had been flown. So I think that there was a lot of nervousness around the council tax surcharge.

00:04:51:20 - 00:04:54:00
Jane Parry
So you're getting squeezed all ways basically

00:04:54:00 – 00:04:56:00
David Goodfellow
And it's not going away Jane, it’s not getting less. 

00:04:56:00 – 00:05:02:00
Jane Parry
No, sadly not. What do we need to do, David, tell us

00:05:02:22 - 00:05:08:15
David Goodfellow
Well, what we need to do is make sure that we are saving for our retirement. 

00:05:08:15 – 00:05:14:00
Jane Parry
Yeah. And pensions presumably are still the best vehicle for that or?

00:05:14:00 – 00:06:32:00
David Goodfellow
Where people can continue to invest in pensions, it is by far the most tax-efficient way of saving for your retirement. I think one of the things that we should do is ensure that one’s savings are across a range of different vehicles. So we talk about pensions, we ensure that our clients are utilising their ISA allowances. It may become more advantageous to start investing in offshore bonds again, something that we haven't really been seeing for a while, but with the increase in taxes on dividends, taxes on interest, the attraction of the offshore bond is it gives investors a choice as to when they pay the tax. And actually, when you're then in retirement, you may have a lower tax rate. You've deferred tax within this vehicle to a point where you know you're a lower tax rate and you might pay less tax on exit. So asset allocation, making sure that the right investments are in the right pots. So for example, if you've got income producing assets it's very useful to have those in the investment vehicles that grow tax free.

00:06:32:00
Jane Parry
So pensions, ISAs 

00:06:33:15 - 00:06:47:00
David Goodfellow
And indeed, your offshore bonds. And then investments that are attracting capital gains having in your general investment account because the tax rates on capital gains is still significantly lower than it is on income tax.

00:06:47:21 - 00:06:50:00
Jane Parry
And what about UK gilts? 

00:06:50:00 – 00:07:07:00
David Goodfellow
So UK gilts are an interesting one. There’s a raft of short, what we would call short-dated gilts that attract very low interest rates because they were issued during the financial crisis and therefore have a very low coupon, very low interest rate.

00:07:07:11 - 00:07:09:00
Jane Parry
What, like what, like nought point something percent?

00:07:09:00 – 00:07:11:00
David Goodfellow
Like 0.125, 0.5 around that

00:07:12:00 – 00:07:24:00
Jane Parry
So even though you're paying a higher rate of tax on the income that you earn on them, you're earning such a low level of income in terms of that return. It's negligible. 

00:07:25:00 – 00:07:47:00
David Goodfellow
And what has happened is that the capital value of those gilts has fallen to below the issue price, and therefore actually the price that you'll get paid when they give you your money back at the end of the term. And the gain between what you pay now and what you're going to get back when the gilt matures - that gain is tax free 

00:07:47:00
Jane Parry
And that's capital growth. 

00:07:49:00 – 00:07:56:00
David Goodfellow
That’s capital growth. So again having those in your own portfolio is a very useful tool 

00:07:56:00 – 00:08:00:00
Jane Parry
Either as a standalone portfolio or within a general investment account or something like that

00:08:00:08 - 00:08:25:21
David Goodfellow
Definitely. We've been talking to clients a lot over the last few years, clients who are sitting on large sums of cash, sometimes for a very specific reason, or just sometimes because that's what they like to do. We talk about how if you're not going to need that cash for a year, there are gilts that will pay out in October next year, in January 27. And we're encouraging clients to use those.

00:08:26:00 - 00:08:49:06
Jane Parry
Yeah. Makes sense. What about cash flow planning? It strikes me, and I'm definitely not a financial planning expert, that reviewing your cash flow plan for the foreseeable future is probably worthwhile now the taxes have changed and what's going on with interest rates as well.

00:08:49:08 - 00:09:55:08
David Goodfellow
Yeah, we do a lot of cash flow planning for our clients. The tools that we use actually the new tax rates are automatically built into those. I do think that particularly when we're looking at the withdrawals, when you're in retirement and where you're going to get your income from, using those cash flow tools is very useful because we would advocate that we try to draw a bit from pensions, a bit from your general investment account, a bit from ISAs, a bit from offshore bonds, if you have one of those, to try to reduce the impact of tax on your income. So revisiting your cash flow plan, and also just bearing in mind the increase in taxes, the increase in taxes across dividends, across your rental income. You know, fundamentally, a couple who are additional rate taxpayers, nearly 50% of their rental income is going to be going in tax. So, you know, that's a significant sum. These things will have an impact on people's cash flows.

00:09:55:08 - 00:10:05:00
Jane Parry
Yeah. And I guess if you know, if that couple are thinking of giving money away to their children to help house deposits and things like that, do you not just have to rethink that in the timing of it maybe? 

00:10:05:00 – 00:10:25:00
David Goodfellow
Everybody’s starting point should be what do I need in retirement? What is it that I'm going to spend in retirement? It's always a difficult one. And we have clients who have been high spenders in their working life who say that suddenly they’re going to reduce their spending by 50%.

00:10:25:04 
Jane Parry
My husband would love that if that was me. 

00:10:27:00 – 00:10:40:00
David Goodfellow
And oddly enough, that rarely happens. And then we have those who have had, you know, maybe a big capital event and feel much more comfortable about their spending, but they've never really spent that much money in the past.

00:10:40:12 - 00:10:44:00
Jane Parry
Right. They might they inherited some money or 

00:10:44:00 – 00:10:57:00
David Goodfellow
You know, oh, I'm going to spend, you know, whatever it is, ten, 15,000 pounds a month. And they've never spent anything like that. And unsurprisingly again, they rarely achieve that. So having an honest conversation about what it is that you need 

00:10:57:21 - 00:11:04:00
Jane Parry
And what do you do, do you plug all that information into a piece of software, presumably, and it chugs out…
 
00:11:04:00 – 00:11:34:00
David Goodfellow
So you start off with your asset base, when you're still working we can work out roughly what you think you're going to be saving between now and when you retire. And then if we know reasonably accurately what it is that you need in retirement, we can then demonstrate: look, you know, you're going to need a sum of x to make sure that you can last, you know, we tend to run these things until sort of people's 90s or to 100.

00:11:34:06 - 00:11:43:11
Jane Parry
I think even though you think you might not live to 99, I think sort of in the back of your mind, you want to plan that because you just don't know, do you?

00:11:43:13 - 00:12:19:08
David Goodfellow
Well, I think that there's two reasons why we do this. One is to demonstrate to somebody that actually, if you don't continue working for a bit longer and have sum of X, if you're going to spend that in retirement, you're going to run out of money in your mid 80s or early 80s. The other reason is that for some of our more wealthy clients, they're trying to work out how much they can give away to their children and succession planning, it is a matter of you’re worth X, you need Y to produce your income and you've got Z and Z’s quite big. You can give it a lot of that away

00:12:20:00 – 00:12:23:00
Jane Parry
And give it away and still live the life you want to live I guess

00:12:23:08 - 00:12:25:05
David Goodfellow
Absolutely, that's very key. 

00:12:25:05 – 00:13:00:00
Jane Parry
You touched on having a well thought out withdrawal strategy. And you talked about us working with clients to decide where's the best place to take money from, particularly going into retirement, I guess. So if you've got a pension, an ISA, we touched on offshore bonds, a general investment account, other savings accounts. So what are the implications of having a look at all of those different sorts of savings accounts? And I guess if you've got property or a buy-to-let and you've got rental income coming from that source, you look at all of, do you?

00:13:00:08 - 00:13:22:00
David Goodfellow
We take everything into account. And the problem with successive governments making big changes to legislation and tax is that our advice has to spin around. So, you know, in 2006 we were saying spend your pension. In 2015, we were saying, save your pension. In 2025 we're saying spend your pension. 

00:13:22:18 - 00:13:35:16
Jane Parry
Yeah. Did you mention to me earlier about dividend taxation? And something really weird that I did not know from all the stuff that I've read in the last few days on the budget

00:13:35:16 – 00:13:54:00
David Goodfellow
Yeah. So it’s a bit of a, I mean, dividend income is a bit of an anomaly. The rates are odd and so when I said that they have increased by 2% with dividend income, basic rate dividend income tax has gone up to 10.75%.

00:13:54:16 - 00:13:56:00
Jane Parry
Ten and three quarters? That's very accurate. 

00:13:57:00 – 00:14:05:00
David Goodfellow
Trips off the tongue obviously. Higher rates have gone up to 35.75. But rather oddly

00:14:05:00 – 00:14:12:00
Jane Parry
So basic and a higher rate dividend income, both have gone up by 2% tax. 

00:14:13:00 – 00:14:22:00
David Goodfellow
Rather oddly the highest rate, the additional rate remains at 39.35%.

00:14:22:03 - 00:14:24:18
Jane Parry
Okay. I love an exclusive on the podcast David

00:14:25:00 – 00:14:48:00
David Goodfellow
There we go, not sure it's an exclusive for me. But I think it has been quite badly reported in the press. But, you know, interest on your bank accounts, rental from your rental properties, they're now taxed at 22, 42 and 47%. So higher than all of the dividend income. And higher than your earned income. 

00:14:48:18 - 00:15:08:21
Jane Parry
Yeah. Wow. Okay. Interesting. Right, I think we have probably overrun our time, so I probably should sum up what is in my Canaccord Coffee Break coffee cup today. So lots of things going on in the budget, keeping our financial planning colleagues in a job for life, it seems.

00:15:08:23 - 00:16:21:00
Jane Parry
I think it's important that clients realise there are actions they can take actually, it's not just doom and gloom. There's some positive stuff that comes out of this. We talked about the importance of cash flow modelling, cash flow planning, just to understand the impact of the changes on people's financial future and consider, less from a tax perspective, but actually what you need going forward and how any changes might impact that. And I guess, as well as tax and interest rates, you factor in, inflation, so I think that's really important to know. I think looking at how you withdraw money you talked about and also what's in your portfolio, because it might be that you're looking to hold assets that will offer capital growth rather than just income. And perhaps working with the financial planners and the investment directors, just to have a look at that in the round is probably worthwhile. So we're here to help. If you've got any questions, please do let us know. Coffeebreak@canaccord.com. I hope you've enjoyed it. Thank you very much indeed for your time today. Do come back again and talk to us. 

00:16:21:00
David Goodfellow
I certainly will, it's been an absolute pleasure. 

00:16:23:00
Jane Parry
Thank you very much.

00:16:24:19 - 00:16:51:06
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.

00:00:10:09 - 00:00:22:17
Jane Parry
Hello and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I am delighted again to be joined by Tom Hibbert from our Chief Investment Office.

00:00:22:18 - 00:00:24:03
Tom Hibbert
Hello, everyone. Good to be back.

00:00:24:03 - 00:00:44:07
Jane Parry
Good afternoon. Afternoon this week. We are on a slightly delayed recording this week because we thought we might wait till the UK budget came out to see what impact that might have on the markets. Grab your earphones, grab your coffee, and listen in for the next ten minutes for a little bit of more information about UK markets.

00:00:44:07 - 00:01:13:21
Jane Parry
And also, what's going on in the world with market volatility. As our regular readers will know, our regular listeners, I should say, this podcast is normally based on our weekly markets review, which we send out to subscribers on a Monday each week. And it's deliberately intended to be bite-sized to demystify what's going on in the markets in a simple and easy to understand manner and hopefully provide you with greater confidence in your financial future.

00:01:13:23 - 00:01:38:09
Jane Parry
So, if you like what you're hearing, don't forget to hit follow on Spotify or Apple so that you never miss an episode. And let's get into it. So, in the last few days, we've seen AI stocks tumbling, credit spreads widening, and the UK's new budget has just dropped. So, are we seeing the first cracks in the bull market and increased market volatility?

00:01:38:11 - 00:01:51:03
Jane Parry
Big questions. But before we get into that, Tom, perhaps you could just give us an update on how markets have reacted immediately after the budget announcement. And was there anything surprising?

00:01:51:05 - 00:02:00:10
Tom Hibbert
Yeah, I wouldn't say surprising necessarily. The market reaction was pretty positive, actually. There wasn't a huge reaction, which is probably a good thing in itself. But it was positive. I mean, if you look at the bond market, for example, UK government bond gilts, gilt yields fell, which means prices rose.

00:02:10:23 - 00:02:11:19
Jane Parry
Which is a good thing.

00:02:11:20 - 00:02:20:06
Tom Hibbert
That's a good thing. And you know what, I think Rachel Reeves was desperate to have a gilt market positive budget.

00:02:20:08 - 00:02:21:16
Jane Parry
Right.

00:02:21:18 - 00:02:25:14
Tom Hibbert
So, what makes a gilt market positive budget, I suppose two things.

00:02:25:17 - 00:02:28:14
Jane Parry
I like the way that you ask and answer your own question. That's good.

00:02:28:16 - 00:02:29:10
Tom Hibbert
Do you want to ask it?

00:02:29:10 - 00:02:31:18
Jane Parry
No, no you go for it 

00:02:31:20 - 00:02:38:19
Tom Hibbert
Okay I suppose that there are two things that really make a gilt market positive budget. One is lower inflation.

00:02:38:21 - 00:02:39:12
Jane Parry
Right

00:02:39:14 - 00:02:50:01
Tom Hibbert
And the second is confidence in fiscal sustainability. So, there's not loads of unfunded spending that it's not irresponsible from a fiscal perspective.

00:02:50:07 - 00:02:53:09
Jane Parry
And that's been a key driver for Reeves actually, hasn't it?

00:02:53:11 - 00:03:01:20
Tom Hibbert
She's been so focused on that. And the market has been very sensitive to the UK's lack of fiscal headroom.

00:03:01:24 - 00:03:02:17
Jane Parry
Right.

00:03:02:19 - 00:03:22:13
Tom Hibbert
And, you know, particularly after Liz Truss and broadly speaking, you know, I think Rachel Reeves, she had two choices. She was at a fork in the road. She could have just done one big move, put up income tax that would have provided the fiscal headroom. She could have done something to reduce inflation as well.

00:03:22:15 - 00:03:40:02
Tom Hibbert
But it would have been very simplistic and that would have been very bad for her popularity and particularly from her own party, and in the backbenches it would have been unpopular, but it would have been gilt market positive and that would have been assured. That would have been the safer approach from a market perspective. She didn't do that.

00:03:40:04 - 00:04:05:06
Tom Hibbert
She decided to go down the death by a thousand cuts routes, the smorgasbord of multiple revenue, raising little idiosyncratic policy changes. And that was a high-risk strategy. But still, I think she achieved what she set out to achieve. That, you know, might be actually, I think pretty bad for the UK on the medium term because they're not policies that support productivity.

00:04:05:10 - 00:04:07:22
Jane Parry
Right. But they do support short term.

00:04:07:22 - 00:04:08:13
Tom Hibbert
But on a short-term view

00:04:08:13 - 00:04:09:24
Jane Parry
Happy gilt market.

00:04:09:24 - 00:04:23:06
Tom Hibbert
Happy gilt market, even lower growth, is a good thing for gilts, I suppose in the short term, because risk appetite is lower and, you know, people will buy gilts and they want safer assets in that sort of scenario.

00:04:23:08 - 00:04:32:00
Jane Parry
So, just thinking about buying gilts. I know that she also put 2% tax on savings and dividends. 

00:04:32:00
Tom Hibbert
Yeah.

00:04:32:00 – 00:04:33:22
Jane Parry
And property as well.

00:04:33:23 - 00:04:36:01
Tom Hibbert
Yes. On the income.

00:04:36:03 - 00:04:40:18
Jane Parry
That is seen as a positive isn't it. Or potentially positive for buying gilts. 

00:04:40:20 - 00:04:45:13
Tom Hibbert
Exactly. That's right. And from our point of view that's one of the positives for the gilt market so…

00:04:45:13 - 00:04:47:02
Jane Parry
And why you might hold gilts and a portfolio

00:04:47:04 - 00:05:17:00
Tom Hibbert
Exactly. Because there are some gilts that were issued with very low sort of coupon payments, the income that they pay out. And gilts are great because they're capital gains tax free. So, the bonds that were issued with those low coupons, they are now trading at a very low price and most of their return which all mature at 100 pounds. So, if you buy gilts for, for example, 90p on the pound, you get back your pound at maturity. That gain is entirely… 

00:05:17:00
Jane Parry
That 10p

00:05:17:00 – 00:05:20:00
Tom Hibbert
Yeah. It's entirely capital gains tax free 

00:05:20:00 – 00:05:20:22
Jane Parry
Okay

00:05:20:22 - 00:05:44:00
Tom Hibbert
So, it makes them very, very efficient. So, if income taxes rise or as they have been put up, you know, savings income's been put up by 2%, that makes the capital gains tax free component of the gilt return very, very attractive and tax efficient. The new tax law will come in in 2027. 

00:05:44:00
Jane Parry
Right

00:05:44:00 - 00:05:55:00
Tom Hibbert
So, it's really relevant for gilts maturing beyond 2027. But it just makes them very tax efficient, low risk investments for higher income or additional rates income taxpayers

00:05:55:05 - 00:06:01:08
Jane Parry
And much more relatively attractive than just having straightforward savings or dividend income, I guess.

00:06:01:08 - 00:06:07:08
Tom Hibbert
Exactly. Much more attractive than savings from the bank. So, I'd be banging the table about this.

00:06:07:10 - 00:06:14:08
Jane Parry
So, what about any other risks or opportunities that investors should watch out for in the weeks ahead?

00:06:14:10 - 00:06:42:16
Tom Hibbert
Yeah, I mean, one of the main things that's happening at the moment is we're seeing a bit of a concentrated selloff in the US technology sector, which has driven the sort of melt up in risk assets that we've seen since April. So, AI stocks are tumbling. We're seeing some other signs of some limited stress, you know, nothing crazy, but it's not panic mode, but a little bit of stuff bubbling under, a few tensions bubbling under the surface.

00:06:42:18 - 00:06:51:19
Tom Hibbert
The selloff in markets has been quite concentrated in the more higher risk elements of the US tech and AI so…

00:06:51:19 - 00:06:54:11
Jane Parry
We talked a lot about AI last week

00:06:54:12 - 00:06:56:02
Tom Hibbert
Yeah

00:06:56:04 - 00:07:05:00
Jane Parry
And we talked about Michael Burry questioning whether companies are assuming an overly long lifespan for GPUs

00:07:05:00
Tom Hibbert
Exactly

00:07:05:00 – 00:07:07:17
Jane Parry
Remind me what that stands for

00:07:07:17 - 00:07:09:08
Tom Hibbert
Graphic processing units, they’re chips effectively

00:07:09:08 - 00:07:14:21
Jane Parry
Yes. You did say that. I need to remember. Remember Jane, for next week. So yeah, a little bit more on that then.

00:07:14:24 - 00:07:54:16
Tom Hibbert
Sure. So maybe I'll frame it like this because the selloff is really driven by the most sort of speculative stocks. There's quite an orderly selloff. It's not driven by panic. It's concentrated in the most sort of speculative areas, of AI innovation in particular. So, you know Cathie Wood, she's a famous growth investor.

She grew to fame, particularly during, after Covid, her funds, the Ark innovation ETF, was up 360% from after the Covid selloff, during that year and did very, very well. And then subsequently gave back all of that in 2021 and 2022.

00:07:54:16 - 00:07:55:15
Jane Parry
Okay.

00:07:55:17 - 00:08:18:00
Tom Hibbert
So, he's sort of gone out of favour a little bit, but it's a really good indicator of risk sentiment. It's a barometer for more speculative tech in particular. So that fund, the Ark innovation ETF had risen 128% from the April lows. And then in the last month or so, it's fallen back by 20%.

00:08:18:00
Jane Parry
Okay

00:08:18:00 – 00:08:23:03
Tom Hibbert
So, you've seen that sort of more speculative area has been where the losses have been concentrated.

00:08:23:03 - 00:08:47:07
Tom Hibbert
Whereas the broader US tech sector has come off the peak by about 4.3%. And last week it was down, you know, around 2%. And at the same time, you've got more defensive sectors, consumer staples, healthcare, performing very well. I mean, last week, both in positive territory. So, I suppose when you see these reversals, pinpointing the single reason is difficult.

00:08:48:05 - 00:08:48:21
Jane Parry
Multiple.

00:08:48:21 - 00:09:11:09
Tom Hibbert
Multiple. Multiple various sort of thing. There are almost always overlapping factors. But the dominant theme I would say, is the one that I highlighted on the podcast last week, with Scion Capital Michael Burry from the Big Short, some of the concerns around the depreciation assumptions for GPUs. And there are some concerns in private credit markets.

00:09:11:11 - 00:09:25:03
Tom Hibbert
There are some concerns that have spilled over into public credit markets as well. And really, it's easier to see the stresses in public markets because they're traded daily. So, we're starting to see credit spreads, rise.

00:09:25:03 - 00:09:27:17
Jane Parry
Credit spreads. Okay. Another term that I need you to explain to me please.

00:09:27:21 - 00:09:46:03
Tom Hibbert
So that's the additional compensation on a bond, on a corporate bond, for example, over a “risk-free government bond”. And I say risk free with sort of quotation marks around it. So, when credit spreads rise, that's a little bit like blood pressure rising. It's when you're sort of anxious and…

00:09:46:05 - 00:09:47:01
Jane Parry
The investors get nervous

00:09:47:01 - 00:09:50:12
Tom Hibbert
Investors get nervous. And it also means bond. The bond prices are falling.

00:09:50:14 - 00:09:57:04
Jane Parry
Okay. So, I’ve learnt that credit spreads, they’re like blood pressure when it rises. Investors get nervous.

00:09:57:00
Tom Hibbert
Exactly

Jane Parry
00:09:57:00 
Okay

00:09:57:04 - 00:10:04:22
Tom Hibbert
And then you're seeing other signs of stress. So, there's one quite interesting derivatives market, the VIX.

00:10:04:24 - 00:10:06:09
Jane Parry
Oh, we talked about the VIX a few weeks ago yeah

00:10:06:14 - 00:10:08:03
Tom Hibbert
Which is a measure of…

00:10:08:04 - 00:10:09:09
Jane Parry
The volatility index

00:10:09:09 - 00:10:10:02
Tom Hibbert
The volatility index

00:10:10:02 - 00:10:10:24
Jane Parry
Yeah, I remember that one. Yes

00:10:11:03 - 00:10:35:08
Tom Hibbert
It’s often called the fear gauge. It's the measure of uncertainty or fear in the equity markets measured by implied volatility, it’s a little bit complicated. But effectively if you want protection on the equity markets you buy options. And when options prices are high the VIX is high. 

00:10:35:00
Jane Parry
Right.

00:10:35:08 - 00:10:54:24
Tom Hibbert
Option prices are high means there's more demand for protection on the equity market. So, it's a measure of demand for protection on the fall in the equity market. So, we saw the VIX spike a little bit last week to the high 20s, which is just an elevated level which does show, you know, is another sign of that tension.

00:10:56:07 - 00:11:04:22
Jane Parry
And then I thought maybe the final sort of potential sign of stress is what's going on in the Bitcoin market.

00:11:04:24 - 00:11:06:03
Tom Hibbert
Yeah, absolutely. And this is an interesting

00:11:06:03 - 00:11:08:01
Jane Parry
That’s our last barometer yeah.

00:11:08:07 - 00:11:25:14
Tom Hibbert
You know correlations change. And Bitcoin and cryptocurrency more generally have lots of different driving factors that drive the correlation. And when risk sentiment is really high, cryptocurrency becomes very correlated with risk sentiment.

00:11:25:14 - 00:11:27:18
Jane Parry
Okay you need to explain that to me, I don't know what that means.

00:11:27:18 - 00:11:36:22
Tom Hibbert
If lots of people are feeling very bullish and very optimistic, they tend to feel very optimistic on cryptocurrencies. So, you get lots of retail investors buying.

00:11:36:22 - 00:11:37:17
Jane Parry
Buying into bitcoin

00:11:37:17 - 00:11:43:21
Tom Hibbert
And then suddenly everyone's panicking and it's often retail investors who are driving the selling. And you have a short sharp selloff in crypto

00:11:43:21 - 00:11:46:07
Jane Parry
And that's what's happened in Bitcoin.

00:11:46:09 - 00:12:09:00
Tom Hibbert
That's what happened in Bitcoin. So, it's fallen from $125,000 in October. It's about, I think it's about 90,000 now. But it fell to 84,000 earlier this week and you know, it's one of those ones where the correlation is a little bit difficult because Bitcoin is known as well as a store of value, an alternative to fiat currency.

00:12:09:06 - 00:12:15:14
Tom Hibbert
But at the moment it is basically a play on risk sentiment, the risk appetite of investors.

00:12:15:16 - 00:12:46:06
Jane Parry
Right. I think we've covered a lot, and we probably have run out of time. So, I probably need to sum up what's in my Canaccord coffee cup today. Thank you very much for giving us a quick update on the impact of the UK budget on markets. That alongside four potential signs of stress, which are the AI stocks in the US…We talked about credit markets. We talked about VIX and the volatility index.

00:12:46:06 - 00:12:47:10
Tom Hibbert
Absolutely, yeah that’s an interesting one

00:12:47:12 - 00:13:07:06
Jane Parry
And Bitcoin also acting as a high-risk barometer of investor sentiment, not always based necessarily on any logic, but just on sentiment

00:12:58:00
Tom Hibbert
Exactly

00:12:58:00 00:13:07:06
Jane Parry
Potentially, some bit of profit taking, a bit of rebalancing going on, rather than a full market pullback.

00:13:07:08 - 00:13:23:00
Tom Hibbert
Yeah. I mean, just to say, the broader fundamentals are very strong. This is really just a bit of hot air coming out of the market. But most of the macro factors to me point to, you know, the market is still strong and the fundamentals are still strong. 

00:13:23:00
Jane Parry
Which is good to know

00:13:23:00 – 00:13:24:24
Tom Hibbert
So, I'm not overly concerned.

00:13:24:23 - 00:13:31:13
Tom Hibbert
In fact, a healthy selloff often makes the bull market more sustainable. I think it's one of those.

00:13:31:15 - 00:13:46:16
Jane Parry
Probably sounds a good place to stop. Thank you very much for listening. I hope you enjoyed the coffee break today. If you have any feedback for us or want any more information, please do drop us an email at Coffeebreak@canaccord.com. Thank you.

00:13:46:21 - 00:13:48:09
Tom Hibbert
Thank you everyone.

00:13:48:11 - 00:14:13:02
Disclaimer
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.

00:00:10:10 - 00:00:22:00
Jane Parry
Hello and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the chief marketing officer here at Canaccord Wealth, and I'm joined today by Tom Hibbert from our Chief Investment Office.

00:00:22:01 - 00:00:22:17
Tom Hibbert
Morning, everyone.

00:00:22:22 - 00:00:46:03
Jane Parry
Great to be here. Nice to see you. So, as our regular listeners will know, this is based on our weekly markets review, which we email out to subscribers on a Monday every week. But the podcast is here to be a little bit more bite-sized to demystify what's going on in hopefully a simple and easy to understand way and give you great confidence to invest in your financial future.

00:00:46:04 - 00:00:56:10
Jane Parry
So, if you like what you're hearing, don't forget to hit Follow on Spotify or Apple and you'll never miss an episode. This week, onto a really interesting subject.

00:00:56:11 - 00:00:57:15
Tom Hibbert
Particularly interesting one today, isn't it?

00:00:57:15 - 00:01:27:07
Jane Parry
Yeah, it's a meaty one today. So, grab your coffee, listen in for about the next ten minutes. This week's meaty subject matter is all about AI, because that's one of our key themes we seem to talk about regularly on the podcast. Over the last month or so, we've talked about AI, we've talked about private credit, shadow banking. And I said at the time, it reminded me of The Big Short and that amazing movie where Christian Bale played Michael Burry, who was the founder of Scion Capital.

00:01:27:09 - 00:01:45:20
Jane Parry
And funnily enough, he's back in the news this week. So, I'm wondering whether I also have extraordinary foresight like he did. So, he has made the headlines again because he’s announced he’s going to close his fund and return capital to investors. And there's quite an interesting debate around why he's doing that and what that really means.

00:01:45:20 - 00:01:53:07
Jane Parry
So here is, Tom, to explain to me in a little bit more detail. So, first of all, can you just give us a little bit of background to that and what's going on?

00:01:53:08 - 00:02:00:00
Tom Hibbert
Yeah, sure. So, the topic is less about him closing the fund and more about his recent positioning. So, I think he's going to continue investing. But…

00:02:00:00 – 00:02:01:00
Jane Parry
Right

00:02:01:00 – 00:02:11:14
Tom Hibbert
…Investing his own sort of his own wealth as a family office. But Michael Burry, most listeners will know him from The Big Short. He runs this hedge fund called Scion Capital, which is closing.

00:02:11:14 - 00:02:33:09
Tom Hibbert
But over the past year, and particularly in the last couple of weeks, he's been very vocal about what he sees as, basically an AI bubble, which is driven by overly generous assumptions sitting behind some of the accounting of those AI companies. So, he's put big short positions on some of the AI leaders. 

00:02:33:09 - 00:02:34:17
Jane Parry
Short positions, explain that to us, first of all.

00:02:34:17 - 00:02:39:17
Tom Hibbert
So, he's betting on the AI bubble bursting, what he thinks is an AI bubble bursting.

00:02:39:20 - 00:02:40:05
Jane Parry
Okay.

00:02:40:05 - 00:03:02:05
Tom Hibbert
And he's only risking $10 million of capital

00:02:45:00
Jane Parry
Only

00:02:45:00 – 00:03:16:19
Tom Hibbert
But in the off chance that this trade works, he could make a vast profit like he did by predicting the housing bubble bursting in the, you know, in the run up to the global financial crisis. So, although he's risking a small amount of capital, there's a potential for a very big gain if the market really does collapse. So, we've spoken on the podcast about some of the very large numbers in terms of the CapEx, capital expenditure in the AI space. And it's his observations there that are sparking quite an interesting debate.

00:03:16:20 - 00:03:28:02
Jane Parry
Yes, I so I think we talked a couple of weeks ago about big tech, looking at investing, was it 400 billion US dollars this year in capital expenditure?

00:03:28:02 - 00:03:28:21
Tom Hibbert
Yes. Yeah.

00:03:29:01 - 00:03:39:15
Jane Parry
I remember talking to John and we were talking about data centres and cloud infrastructure and stuff like that. So, what's happening here about that investment.

00:03:39:15 - 00:03:46:08
Tom Hibbert
Sure, so half a trillion expected next year, $1 trillion over five years of these mega-cap tech companies.

00:03:46:08 - 00:03:47:17
Jane Parry
Wow, enormous numbers.

00:03:47:19 - 00:04:16:09
Tom Hibbert
Huge. And the prevailing mindset in parts of the industry is that basically it's a mega race for AI, it's a winners take all, game. So, it's not just between companies, actually. It's also between geopolitical blocs like the US and China. The administrations are really chasing general intelligence. It's an arms race, the first to get to general intelligence because the pace of innovation is so great.

00:04:16:11 - 00:04:29:15
Tom Hibbert
So, it creates a very high stakes sort of arms race dynamic. And you have hundreds of billions, trillions flowing into extremely expensive and rapidly advancing chips, GPUs.

00:04:29:16 - 00:04:30:13
Jane Parry
GPUs, what’s that stand for?

00:04:30:13 - 00:04:33:18
Tom Hibbert
Graphic processing units. But, microchips.

00:04:33:24 - 00:04:34:23
Jane Parry
Okay.

00:04:35:00 - 00:04:55:07
Tom Hibbert
And then the data centre build out, obviously around that as well. So, these aren't slow sort of utility style assets. The upgrade cycle, the innovation cycle is incredibly fast. NVIDIA now has a one-year product cycle. And the improvement, the scale of improvement in each of those cycles, the improvement in compute power is vast.

00:04:55:09 - 00:05:07:14
Jane Parry
Okay. Interesting. So that’s high stakes arms race, whether it's companies or continents. So, looping back to Burry, what are his concerns then?

00:05:07:20 - 00:05:31:00
Tom Hibbert
Sure. So, I suppose his concerns aren't that AI won't be transformational. It almost certainly will. It's more about some of the accounting treatments that they're using around the useful life assumptions of those chips basically on their balance sheet, if they depreciate them, over more years than their actually economic useful life. 

00:05:31:00
Jane Parry
Right

00:05:31:00 – 00:05:49:21
Tom Hibbert
It'll flatten near-term profits.

So, for example, if a company buys $100 billion of GPUs with, in reality, a one-year useful economic life, and they depreciate it on their balance sheet over two years, then they will be, you know, magically inflating their earnings by $50 billion.

00:05:49:21 - 00:05:50:12
Jane Parry
Okay.

00:05:50:14 - 00:06:16:23
Tom Hibbert
And you know, if the real replacement costs, the replacement cycle is much shorter, then the ongoing costs are higher. And, you know, because new chips make older ones less competitive, then today's earnings will be being pulled forward from future earnings. And that's the risk I suppose. So, it's less about the technology failing and more about whether the profitability metrics are being exaggerated by aggressive accounting.

00:06:16:23 - 00:06:22:17
Jane Parry
Okay. So, whether the accounting is matching the life cycle of a chip.

00:06:22:17 - 00:06:31:13
Tom Hibbert
Yeah, exactly. So, Burry's concern is, you know, why are you extending the assumed useful economic life of chips when innovation cycles are…

00:06:31:13 - 00:06:32:05
Jane Parry
Are getting shorter as well

00:06:32:07 - 00:06:33:00
Tom Hibbert
Much shorter

00:06:33:02 - 00:06:33:12
Jane Parry
Yeah.

00:06:33:17 - 00:06:51:15
Tom Hibbert
There are credible arguments from these companies about why they're doing that. So, they're repurposing older chips and using moving them into lower intensity tasks. But the simple truth is, no one really knows yet what the actual true shelf life of these assets is going to be because the technology curve is so steep.

00:06:51:17 - 00:07:02:13
Jane Parry
Okay, so I can see why he is flagging that as an issue. And good that he's raising the topic and people are starting to talk about it, I guess. So, thinking back then, what were people doing?

00:07:02:15 - 00:07:03:17
Tom Hibbert
What are the actual assumptions?

00:07:03:17 - 00:07:04:07
Jane Parry
Yeah.

00:07:04:09 - 00:07:18:05
Tom Hibbert
Yeah, I mean, so I said that they're assuming it at 1 and 2, it was a simple, simplified example. In reality, the useful life or the depreciation schedules that they've used have gone from sort of 3 to 4 years to 5 to 6 years.

00:07:18:05 - 00:07:19:00
Jane Parry
Okay.

00:07:19:02 - 00:07:37:21
Tom Hibbert
The logic on their side, as I said, is that those chips don't immediately become worthless once they're no longer cutting edge, they're shifted into lower intensity things. And then the longer economic life is valid. But there's also a global shortage of chips. So, every single chip is being used to its maximum extent.

00:07:37:21 - 00:07:38:08
Jane Parry
Yeah.

00:07:38:10 - 00:07:58:05
Tom Hibbert
Which you know then there is evidence as well of strong resale demand in the secondary market. So, there are good reasons. And at the same time, you know, corporates need to be really careful about the accounting assumptions that they use. They need to have a very good argument to explain to their auditors, for example, about how they get to those conclusions, how do they get to their accounting principles.

00:07:58:05 - 00:08:26:00
Tom Hibbert
Analysts who cover the stocks obviously understand how accounting works. So, they often look at cash flows. 

Rather than sort of earnings which can be manipulated quite easily. It's not like the wool is being pulled over the entire industry's, eyes. It's just the questions, as I say, are about why are these depreciation cycles being extended? Is there a risk here that it's aggressive accounting rather than the actual extension of useful economic life of these chips?

00:08:26:02 - 00:08:30:11
Jane Parry
But I guess the truth is it's difficult to know exactly what's going to happen in the years ahead.

00:08:30:11 - 00:08:39:13
Tom Hibbert
Yeah, exactly. It's very much an open debate. No one really knows. Even the experts don't know what the future holds and how fast moving this industry is going to continue to go.

00:08:39:15 - 00:09:17:14
Jane Parry
So just in the interest of time, let me just quickly sum up what's in my Canaccord takeaway coffee cup this week. We are talking about The Big Short, the Scion of that industry, Michael Burry, and AI remains one of the most powerful and well-funded investment themes globally. But now there’s this debate kicking around about how it's capitalized and how it's accounted for. Less about whether AI will have an impact on the world going forward, because undoubtedly it will.

But more about how people are accounting for it, and accounting for CapEx into it going forward. Should we, be concerned about that?

00:09:17:14 - 00:09:28:10
Tom Hibbert
Yeah, it's quite a technical accounting thing that sort of, you know, you have to get into the weeds to understand where the risks come from. And that's often the case in these financial market instances, say.

00:09:28:12 - 00:09:30:00
Jane Parry
Interesting times as ever. 

00:09:30:00
Tom Hibbert
Absolutely 

00:09:30:00 – 00:09:44:15
Jane Parry
Thanks very much for your time. I hope you enjoyed the Coffee Break podcast. Don't forget to hit follow so you never miss an episode. Tom, I hope you’re following us. Any thoughts, please do share them with us: coffeebreak@canaccord.com. Thank you very much.

00:09:44:15 - 00:09:46:00
Tom Hibbert
Thank you for listening everyone.

00:09:46:02 - 00:10:10:18
Disclaimer
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.

00:00:10:08 - 00:00:23:01
Jane Parry
Hello and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I'm delighted today to have the return of Tom Hibbert from the Chief Investment Office.

00:00:23:03 - 00:00:23:23
Tom Hibbert
Morning, everyone.

00:00:24:00 - 00:00:51:04
Jane Parry
Morning, nice to have you back. So, as you know, the podcast is based on our weekly market review that we send out to subscribers on a Monday every week. The idea is that we try to be a little bit bite sized. We try to demystify what's going on in a simple, easy to understand manner so you hopefully can have a greater confidence in your financial future.

00:00:51:06 - 00:01:13:23
Jane Parry
So, if you like what you're hearing, don't forget to hit follow on Spotify or Apple or your podcast channel of choice so you'll never miss an episode. So welcome to this week's Canaccord Coffee Break. Grab your coffee and listen in for about the next ten minutes. So, Tom, it feels like it's been a quiet news week and that all everyone has been talking about is traitors.

00:01:14:01 - 00:01:26:13
Jane Parry
So, this week we're going to go from reality TV betrayals to fiscal promises and are we seeing similar plot twists in UK politics?

00:01:26:14 - 00:01:30:21
Tom Hibbert
Yeah, absolutely. I mean, you say celebrity traitors. I've been so into it. It's been fantastic.

00:01:30:21 - 00:01:31:23
Jane Parry
Amazing wasn’t it?

00:01:32:00 - 00:01:38:12
Tom Hibbert
To see the final showdown between Alan Carr and Joe Marler. I never thought I'd see something like that, but, fabulous.

00:01:38:13 - 00:01:40:07
Jane Parry
Did you shout at the telly?

00:01:40:09 - 00:01:43:15
Tom Hibbert
You know, I probably did. I can't remember, it was just a blur.

00:01:43:17 - 00:01:47:20
Jane Parry
So, we were screaming at the telly: no Nick! How did you do that?

00:01:47:22 - 00:02:06:06
Tom Hibbert
I know, betrayal is rarely as dramatic as that, is it? But I heard that the game is based on a Russian psychologist who wanted to show that an informed minority can always outmanoeuvre an uninformed majority. It's quite interesting.

00:02:06:07 - 00:02:08:07
Jane Parry
I wonder whether you could say the same about the markets.

00:02:08:09 - 00:02:12:06
Tom Hibbert
Yeah, well, we've gone for a bit of celebrity traitors theme this week, haven't we?

00:02:12:06 - 00:02:14:24
Jane Parry
Yeah we have.

00:02:14:24 - 00:02:15:19
Tom Hibbert
More for dramatic effect.

00:02:15:21 - 00:02:40:21
Jane Parry
Back to that. So, is Rachel Reeves Tom a fiscal faithful or is she betraying the electorate and her promises around further tax rises? That's the question this week. So, what next for fiscal policy and why it matters for investors? A couple of weeks ago we talked about the Laffer curve, I think it's probably pertinent to get into that in a little bit more detail this week.

00:02:40:22 - 00:02:53:23
Tom Hibbert
Sure. So, Arthur Laffer, he's an American economist. I mentioned that a few weeks ago. We can expand on it with the with the budget coming up. So, the idea is very simple. It effectively states that there's an optimal tax rate.

00:02:54:00 - 00:02:54:09
Jane Parry
Yeah.

00:02:54:10 - 00:03:18:22
Tom Hibbert
And if you raise taxes beyond that point, you don't get increased revenue. So eventually you end up with an inverse relationship between tax rates and the revenue that you generate. Because when you raise taxes beyond that point you end up depressing growth, disincentivising work, lower confidence. You depress business activity, so you end up with low growth.

00:03:19:02 - 00:03:20:23
Jane Parry
So it acts as a total disincentive?

00:03:20:24 - 00:03:34:04
Tom Hibbert
Yeah, exactly. And it's just bad for everyone. So, Rachel Reeves originally positioned herself at the beginning of this government around the kickstarting growth. That was the tagline.

00:03:34:07 - 00:03:35:08
Jane Parry
How's that going for her then?

00:03:35:10 - 00:04:04:15
Tom Hibbert
Well, exactly. You know, creating this pro-investment environment. She explicitly ruled out, income tax rises and other tax rises. And we now have the highest tax burden since the 1940s. And the direction of travel is for that to only rise further. Particularly after the recent some noises that have been coming out of the government. So, yeah, it's now starting to feel a little bit more like revenue extraction rather than any sort of growth strategy.

00:04:04:17 - 00:04:27:08
Tom Hibbert
So, I'm pretty confident, just going back to the Laffer curve that the UK is already on the wrong side of the curve. Arthur Laffer himself, he said that a. the UK is a textbook case of taxing the productivity base to the point of harm. He says that the UK is taxing itself to death. So, I'm pretty confident that the UK doesn't need higher taxes at this point.

00:04:27:09 - 00:04:38:10
Tom Hibbert
It needs more output, higher output. So tax hikes without a credible pro-growth plan is just going to risk embedding stagnation. And I think we're now getting to that sort of point.

00:04:38:11 - 00:04:50:05
Jane Parry
What happens if the government's actions risk trashing the economy? I think you mentioned that in the weekly markets review this week. And why might Rachel Reeves risk doing that?

00:04:50:07 - 00:05:02:00
Tom Hibbert
Yeah. And trashing the economy, I was quoting Mark Dowding, who's the Chief Investment Officer of BlueBay, who we will come on to in a moment, but there does seem to be this obsession with short term fiscal headroom in Westminster.

00:05:02:00 - 00:05:03:04
Jane Parry
And so, what does that mean?

00:05:03:05 - 00:05:23:23
Tom Hibbert
So, at the start, the labour the government has this idea. The first point in their economic strategy is to drive economic stability through tough spending rules and those fiscal rules, in their own words, are non-negotiable. And it's kind of focused on short term fiscal headroom, that they've sort of defined themselves.

00:05:23:23 - 00:05:29:10
Jane Parry
So, headroom being the amount they receive in from taxes versus the amount they're spending. 

00:05:29:10 - 00:05:48:11
Tom Hibbert
Pretty much, I mean, how much they can effectively spend. Those fiscal rules have now sort of become the tail that's wagging the dog. And there is this growing voice that it's now dominating their policy and in a way that they might now tolerate, short term economic weakness or trash the economy effectively to achieve more fiscal headroom.

00:05:48:11 - 00:06:08:15
Tom Hibbert
And how that would work is a slowdown, a significant slowdown in the UK economy would extinguish the inflationary pressures. Lower inflation would then bring interest rates down. The Bank of England could cut rates. You'd get lower bond yields. That would reduce government borrowing costs. And then you would have the additional fiscal headroom that Westminster is so obsessed with.

00:06:08:17 - 00:06:31:17
Tom Hibbert
So yes, in theory, Labour could tolerate some economic weakness to ease the pressure on the gilt markets and to rebuild that fiscal headroom. But the cost is very real for the economy, and it's kind of putting the burden on, businesses and employees workers. So, you end up with slower wage growth, weaker employment conditions, maybe higher unemployment, lower business investment, lower output, lower growth.

00:06:31:17 - 00:06:38:15
Tom Hibbert
And, you know, we could end up with a situation where that short term weakness is sort of played off as necessary pain.

00:06:38:15 - 00:06:48:08
Jane Parry
Without getting political. What's the alternative view to that? What might governments do to try and support growth rather than sort of this obsession with the fiscal headroom in the short term?

00:06:48:10 - 00:07:08:00
Tom Hibbert
Sure. And we are now seeing some growing voices arguing the focus needs to shift away from that fiscal arithmetic towards rebuilding the productive base of the economy. Stop obsessing over the deficit on a short-term view and start thinking about how to grow the economy in the medium term, over 5 to 10 years.

00:07:08:02 - 00:07:32:17
Tom Hibbert
So, there's a think tank, the Centre for a Better Britain, which is being advised by some very experienced market practitioners. I mentioned Mark Dowding, he's one of those people, Chief Investment Officer at BlueBay. He started to lay out the foundations for how that could work in practice and it's about balancing fiscal prudence with prioritising growth, deregulation. So, you reduce the size of the state where it's grown inefficiently, particularly the civil service, you tighten welfare eligibility so that support is really targeted to those who need it the most. So maybe you need test, pensions, for example. You prioritise a deregulatory agenda, make it easier to start and expand businesses, a better environment for businesses to grow. And some of this thinking is now feeding into, political strategy on more on the right side of politics.

00:07:57:00 - 00:08:19:17
Tom Hibbert
So, Nigel Farage last week in a speech he toned down some of his earlier commitments to reduce taxes, to cut taxes, saying that, you know, there isn't the fiscal ability to do that at the moment. But he's then emphasised the need to grow the economy first, improve that, efficiency and productivity base, and incentivise investment and the business environment.

00:08:19:17 - 00:08:33:13
Jane Parry
Yeah. Which I guess from our perspective and from clients who are investing that that's what we'd be looking for. So, you know, where does this leave the outlook for growth and for the markets and ultimately our clients’ portfolios, I guess.

00:08:33:17 - 00:08:42:19
Tom Hibbert
Yeah. So, there's an important data point tomorrow, which is the UK GDP release. Growth is expected to slow, mildly.

00:08:42:19 - 00:08:43:03
Jane Parry
Yeah.

00:08:43:08 - 00:08:52:07
Tom Hibbert
But there's a view that the combination of higher taxes, lower productivity and sort of fragile confidence is acting as a bit of a brake on growth.

00:08:52:07 - 00:08:54:19
Jane Parry
Nobody seems to be doing anything until the budget comes.

00:08:54:21 - 00:09:08:23
Tom Hibbert
Yeah. So, you can see that caution already coming through with, I mean, you can sort of sense it, but you can see it coming through in some of the data as well, some of the soft data. So that's obviously important for the outlook for investment markets, for the economy, for everybody who lives here. But you can also be a little bit too negative.

00:09:08:23 - 00:09:18:05
Tom Hibbert
It's worth remembering that UK domestics from mid and small cap equities are up 18% for the year. There's been some pressure in the gilt market as bond vigilantes have been sort of…

00:09:18:07 - 00:09:19:02
Jane Parry
Oh, bond vigilantes, love it.

00:09:19:04 - 00:09:39:12
Tom Hibbert
…Have been, putting pressure on the UK government bond markets. But we have seen a lot of that pressure release in the last few weeks. We've seen quite a sharp fall in bond yields, which is a good thing, largely that's been driven by global factors and a bit of a softening, or at least a more accommodative stance from the Bank of England, slower than expected inflation.

00:09:39:12 - 00:09:55:00
Tom Hibbert
So, there are some positive things happening in the background. But I think we just need to have a shift in policy now that balances fiscal prudence with growth. And you know I'm not hugely optimistic at the moment, but at least there are those conversations happening in the background. 

00:09:55:02 - 00:10:01:20
Jane Parry
Yeah. So at least as you say, the people are talking about this sort of thing. Hopefully that might influence where things go in the future.

00:10:01:22 - 00:10:02:17
Tom Hibbert
I hope so.

00:10:02:19 - 00:10:36:19
Jane Parry
So let me sum up what's in my Canaccord takeaway coffee cup today. We discussed what's next for fiscal policy and why that matters for investors, and that Rachel Reeves is still signalling further substantial tax rises despite her previous reassurances. And is she the Nick Mohammed of the political world? 

Tom Hibbert
Or the Alan Carr.

Jane Parry
And we talked about potentially that the UK is on the wrong side of the Laffer curve and that this risks depressing investments and long-term growth.

00:10:36:21 - 00:10:57:15
Jane Parry
But the conversations are happening. Let's be optimistic. Let's channel our inner Alan Carr and see what happens over the next couple of weeks. So, thank you all for listening. I hope you enjoyed the Canaccord Coffee Break podcast. Don't forget to hit follow so you never miss an episode. And if you've got any thoughts, please share them with us at Coffeebreak@canaccord.com.

00:10:57:15 - 00:10:58:17
Tom Hibbert
Thank you for listening, everyone.

00:10:58:17 - 00:11:00:03
Jane Parry
Thank you very much.

00:11:00:05 - 00:11:22:00
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.

00:00:09:18 - 00:00:24:00
Jane Parry
Good morning. 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 a special guest star, John Pullar-Strecker. Good morning. 

00:00:24:00
John Pullar-Strecker 
Good morning, Jane.

00:00:25:00 – 00:00:26:00
Jane Parry
Morning, morning. 

00:00:26:00
John Pullar-Strecker 
Lovely to be here.

00:00:27:00 – 00:00:39:00
Jane Parry
Thank you for coming. John is a research specialist in our Chief Investment Office. We'll come to some of his specialisms in a little bit. But first of all, John, what is your coffee of choice? 

00:00:39:00 – 00:00:49:00
John Pullar-Strecker 
So, my coffee of choice, in the morning, cappuccino with double espresso shot. A couple of those keeps me going for most of the day.

00:00:49:00 – 00:02:16:23
Jane Parry
I think it's going to be a lively podcast today with all that cappuccino inside you. Brilliant. Well, if you're new to the podcast, like John, just so you know, this is based on our weekly markets review, which we send out to subscribers on a Monday each week. The podcast really is here to help people understand a little bit more about what's going on in the markets, which we think is a good thing because everyone or nearly everyone is dependent on the markets for our financial future, for our retirement plans, to help out our kids or whatever it might be. So, I'm kind of here to ask the dumb questions that I think friends, family, clients want to know a little bit more about. It's deliberately aimed to be bite-sized, to demystify and hopefully give people a bit of confidence in their financial future. And also, this is especially for my friend Nick - if you like what you're hearing on the podcast, don't forget to hit follow on Spotify or Apple and you'll never miss an episode. So welcome to this week's coffee break. And grab your coffee, listen in for about the next ten minutes with me and John. And we are going to talk about all things AI and tech today. John is particularly a research specialist in high growth sectors of the global economy that includes robotic surgery, information technology, AI as I've mentioned, also Pet diagnostics, which I think you might need to come back onto the podcast to talk to us about in a little bit more detail another time.

00:02:16:23
John Pullar-Strecker 
I’d be delighted to.

00:02:17:00 - 00:02:38:00
Jane Parry
But for today, let's get into the tech stocks. So, I saw last week that the top ten stocks in the US 500 now make up over 40% of that index, which is a really sort of narrow market leadership over there. Can you just tell us a little bit more about what's going on with those stocks, a bit more background?

00:02:38:00 – 00:03:01:00
John Pullar-Strecker 
And just to put that into to the context, if we look at Nvidia, Microsoft and Apple, each of those companies individually is valued in terms of market capitalization, at least the same level as the entire UK stock market or indeed the UK’s GDP.

00:03:01:00 - 00:03:03:00
Jane Parry
Okay, so they're bigger than our whole nation. 

00:03:03:00
John Pullar-Strecker 
They are.

00:03:04:00
Jane Parry
Each one?

00:03:04:00 – 00:03:08:00
John Pullar-Strecker 
They are bigger. Each one. Absolutely. 

00:03:08:00 – 00:03:10:00
Jane Parry
So they're just three of the top ten.

00:03:10:00
John Pullar-Strecker 
They’re just three of the top ten. Most of those top ten are technology companies of different types. If we think about Amazon and Apple as being at least partially technology companies, albeit Apple make real things that we use every day.

00:03:26:18 - 00:03:38:00
Jane Parry
Yeah. Indeed, they do. So, let's go into talking a little bit more about AI and what's driving that demand for those stocks, what those companies actually do and create. 

00:03:38:00 – 00:04:00:00
John Pullar-Strecker 
Absolutely. So, if we look at, say, Microsoft's latest figures in terms of its cloud computing growth, which is measured through Azure or Amazon Web Services, about half of that growth, and this is a company that's growing its cloud business over 30%, which is huge.

00:04:00:00
Jane Parry
Per annum?

00:04:00:00 – 00:04:01:00
John Pullar-Strecker 
Per annum. 

00:04:01:00
Jane Parry
Wow. 

00:04:02:00 – 00:04:04:00
John Pullar-Strecker 
Bearing in mind how big it is already. 

00:04:04:00
Jane Parry
Yeah. Yeah. 

00:04:04:00 – 00:04:33:00
John Pullar-Strecker 
Growing at over 30%. About half of that growth is directly from artificial intelligence. And the rest of that growth is from general sort of cloud computing where’ll we be using more data. That data needs to be stored. It needs to be transformed and within businesses. So that's the kind of level of growth that we're talking about. And that's one of the reasons why we've seen these share prices move up so rapidly. 

00:04:33:00 – 00:04:47:00
Jane Parry
And those companies are reinvesting a lot of money back into data centres because I saw some amazing numbers last week. They're increasing capital expenditure from 400 billion USD to 500 billion USD.

00:04:47:01 – 00:00:48:00 
John Pullar-Strecker 
Yes. 

00:00:48:00 – 00:04:50:00
Jane Parry
It sounds huge to me. So, what's that money going into?

00:04:50:00 – 00:05:00:00
John Pullar-Strecker 
It's increasing rapidly and a lot of that money's going to data centres for racks of computers that help store that data. 

00:05:00:00 
Jane Parry
Literally the hardware .

00:05:02:00 – 00:05:17:00
John Pullar-Strecker 
Yeah. The hardware, the software that surrounds that. All the cables, the power, the electricity for us to be able to manipulate all of that information because most companies now, most of their data is in the cloud.

00:05:17:00
Jane Parry
Yeah. 

00:05:18:00 – 00:05:33:00
John Pullar-Strecker 
There are no physical servers in the businesses. It's out there in the ether. I think you make a great point, Jane. And if we if we compare what's going on today versus what some people have talked about in, say, 99, 2000, or Y2K.

00:05:33:00 - 00:05:37:00
Jane Parry
Yeah, I was around for that because I am that old. Yeah. Year 2K.

00:05:37:00 – 00:05:48:00
John Pullar-Strecker 
It was a very, very exciting time. And it wasn't a bubble. It was a wave. It was a giant wave. Look at everything it left behind. Mobile telephony was still new. The internet was still new.

00:05:48:00
Jane Parry
Yeah.

00:05:48:00 – 00:06:21:00
John Pullar-Strecker 
And we had all these computers that needed to be upgraded to move from a two-digit world to a 4-digit world. And people were going out and burying food in the desert because they thought everything was going to collapse. A lot of that growth was funded from debt, venture capital. And when the applications didn't come out, maybe as fast as we'd all sort of hoped, you know, that caused a real hiccup that led to, you know, the sector getting hit very, very hard.

00:06:21:00 – 00:06:23:00
Jane Parry
Yeah. And that was the .com bubble that burst

00:06:24:00 – 00:06:26
John Pullar-Strecker 
Yes exactly. Giant wave of spending. 

00:06:27:00
Jane Parry
Yeah. 

00:06:27:00 – 00:06:51:00
John Pullar-Strecker 
This time round we have companies that have multi-billion dollars in terms of revenues and in the bank. And they are reinvesting that cash into new areas of growth. So they are sort of helping self-sustain. There is investment coming from other areas. But it's much more sustainable on that basis than perhaps it was the last time.

00:06:51:00 - 00:07:00:00
Jane Parry
And how do you see that translating into profits down the line? I mean, they're all massively profitable companies anyway, but that's a huge amount of money they're putting in.

00:07:00 - 00:07:17:00
John Pullar-Strecker 
Well, they are, and I think what's again, what's sort of different if we think about the world in terms of, you know, Heinz baked beans, you know, for example, in factories and how many beans can each individual household eat, how many chickens? It's kind of easier to quantify. 

00:07:17:00
Jane Parry
Yeah. 

00:07:17:00 – 00:07:33:00
John Pullar-Strecker 
I mean, how big can Heinz be on that basis. We're dealing with companies that suddenly eat into and in some cases develop new industries that have no physical or say fewer physical boundaries. So how fast can they grow?

00:07:33:00 - 00:07:37:00
Jane Parry
And that demand, we have no idea how much demand there’s going to be for those services. 

00:07:37:00 – 00:07:51:00
John Pullar-Strecker 
Well, we know that demand is increasing in the same way that we know that the jobs that we're doing are changing. And lots of people are using ChatGPT and other sorts of chat boxes to help them in their daily chores. I'm sure you are.

00:07:51:00 - 00:07:52:00
Jane Parry
Yeah, I do. 

00:07:52:00 – 00:08:22:00
John Pullar-Strecker 
But also if we think about the next big leap, it’s going to be about the industrial internet of things, about digital twins turning real factories, being able to mimic them, as it were, in the digital world, and then move from a digitally designed factory to a real-world factory. And the fact that one can test everything within that factory, including perhaps robots. 

00:08:22:00
Jane Parry
Yeah. 

00:08:22:00 – 00:08:35:00
John Pullar-Strecker 
How they work, how they interact with each other, making sure they don't trip up. It makes everything more efficient. So, when you come to build the factory, you know how it's going to work and it requires fewer people to be able to do it.

00:08:35:00
Jane Parry
So much more productive.

00:08:37:00
John Pullar-Strecker 
Much more productive.

00:08:38:00
Jane Parry
Fast tracking.

00:08:38:00 - 00:08:55:00
John Pullar-Strecker 
And it's going to - absolutely. And it's going to help. That's going to be one of the main reasons why industry will reshore to the US. It has to be more efficient because they don't have enough people with those kind of skills. So, it will be AI, robotics and so on that will drive that growth. 

00:08:55:00 – 00:08:58:00
Jane Parry
Interesting times.

00:08:59:00
John Pullar-Strecker 
Fascinating times. The biggest changes to the way that we work, think and interact that we've seen and it's incredible. 

00:09:07:00
Jane Parry
Yeah. Very exciting. Well, thank you very much. 

00:09:10:00
John Pullar-Strecker 
You’re most welcome.

00:09:10:00 – 00:10:02:00
Jane Parry
Thank you for your insight today. So, I usually sum up what's in my Canaccord takeaway coffee cup at this point. So, we've talked about the top ten companies in the US dominating the market getting stronger all the time, well-run businesses seemingly meeting an unlimited demand for cloud computing, for AI requirements and that's moving into virtual factories and becoming more productive, but there’s little historical precedent for this growth and capital expenditure on this scale. But interestingly, the investment is being funded from the company's own cash flow rather than external venture capitals or issues in the main, hopefully that makes it more sustainable. And as long as demand for AI capacity cloud computing revenues continues to grow, all that investment may well be justified this time.

00:10:02:00 - 00:10:25:00
John Pullar-Strecker 
Let's hope so. The beauty of this business is that we find out exactly what's going to happen. No one can predict it. Things move in waves. Markets will get overexcited, and then they'll become a little bit too pessimistic. And, you know, we will see that the world is going to be very different in five to ten years. We just don't know exactly how it's going to change.

00:10:25:00 – 00:10:28:00
Jane Parry
Brilliant. Well, thank you very much. Thank you for your time.

00:10:28:00
John Pullar-Strecker 
Great to be here.

00:10:28:00 – 00:10:29:00
Jane Parry
Come and join us again on the podcast. 

00:10:30:00 – 00:10:33:00
John Pullar-Strecker 
Yeah, I'd love to. Perhaps we can talk about pet diagnostics or quantum computing.

00:10:33:00 – 00:10:46:00
Jane Parry
Or all those other things I also know absolutely nothing about. I hope you enjoyed today. Thank you. And if anybody's got any feedback, please do drop us an email. Coffeebreak@canaccord.com. We'd love to hear from you. Thank you very much.

00:10:48:00 - 00:11:13:17
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 - 00:00:23:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And today I'm delighted to be joined by Tom Hibbert.

00:00:23:00 - 00:00:24:00
Tom Hibbert
Morning again everyone.

00:00:24:00 - 00:00:30:00
Jane Parry
Morning, morning. And Tom, I'm not noticing your Halloween wizard’s outfit this week.

00:00:30:00 - 00:00:33:00
Tom Hibbert
I do look a lot like Harry Potter.

00:00:33:00 - 00:00:35:00
Jane Parry
You do a little bit. Yeah, yeah, you do a little bit.

00:00:35:00 - 00:00:36:00
Tom Hibbert 
I'm in dress naturally.

00:00:36:00 - 00:01:31:00
Jane Parry
So, I was going to get a pumpkin spice latte to get us in the mood for today, but really far too sweet for me. So still on Black Americanos. But I am thinking about all things that we could be scared about in relation to the economy, the markets and what also what might be happening to tricks and taxes in the UK budget next month. So in this Halloween edition of the podcast, we're going to be talking about inflation, death and taxes. Now that's a cheery subject for us. So, if you've not listened to the podcast before, the idea behind it is we take our weekly markets review, which is sent out to subscribers on a Monday weekly, and we deep dive into some of the more interesting areas to get a better understanding from Tom. So grab your coffee, plug your ears in, and listen in for about the next ten minutes to hear a little bit more about what we think's going on. So, this week has been all about inflation numbers.

00:01:31:00 - 00:01:32:00
Tom Hibbert
It has indeed.

00:01:32:00 - 00:01:37:00
Jane Parry
Both here and in the US, and perhaps not as scary as it might have been.

00:01:37:12 - 00:01:37:24
Tom Hibbert
Absolutely.

00:01:38:01 - 00:02:04:00
Jane Parry
As I understand it, UK inflation undershot expectations, sparking a rally in gilts or UK government bonds as we know them, and also small and mid-cap equities, which were all priced in an increased probability of the Bank of England cutting rates. US inflation also came in lower than expected, boosting expectations of a near-term Federal Reserve rate cut, possibly even this week.

00:02:04:01 - 00:02:04:19
Tom Hibbert
Absolutely.

00:02:04:21 - 00:02:13:16
Jane Parry
So first off, Tom, perhaps we can just have a little look at the UK inflation situation and just give us some of the facts and figures and what's going on.

00:02:13:18 - 00:02:56:14
Tom Hibbert
Sure. So we've obviously been in an inflationary cycle. Inflation has been too high. And in the UK in particular it's been persistent. And so any fall in inflation is fundamentally good news. And last week we saw quite a significant downside surprise in inflation. So month on month it came in at zero versus expectations of a rise of 0.3%. So quite a significant surprise to the downside. That pushed annual inflation down to 3.8%. Still well above the Bank of England's target of 2%, but it was expected to come in at 4%.

00:02:56:15 - 00:02:57:23
Jane Parry
Okay.

00:02:57:23 - 00:03:36:14
Tom Hibbert
But why this was a particularly strong surprise is that it seems to have come with a bit of a tone shift around the whole inflationary narrative where we are in the cycle. It seems like we might be at a bit of a turning point where we start to see a more consistent downward trend in inflation from here. So economists, including those at the Bank of England, think that this print marks the peak of inflation in this cycle and that they see it slowing to about 3.4% by the end of the year, and then to 2.5% by the end of next year, with a really sharp deceleration starting in the spring.

00:03:36:16 - 00:03:41:09
Jane Parry
Okay, great. So still higher than the target 2%, but downward trajectory.

00:03:41:11 - 00:03:42:09
Tom Hibbert
Exactly.

00:03:42:11 - 00:03:49:24
Jane Parry
Okay. So, I mentioned the positive impact on the markets. Can you just tell us a little bit more about how the markets reacted to this.

00:03:50:01 - 00:04:14:00
Tom Hibbert
Sure. Markets reacted really positively. They loved it. And traders rushed to price in the higher probability of interest rate cuts from the Bank of England this year. And it was also combined with other positive economic surprises. So there was a spike in retail sales which was expected to be negative. It actually came in quite strong. And then economic activity as measured by purchasing manager indices.

00:04:14:01 - 00:04:55:08
Jane Parry
Right.

00:04:05:09 - 00:05:07:12
Tom Hibbert
They also showed some stronger economic activity in the UK. So slower inflation and stronger economic performance is obviously a good thing. And that triggered a broad rally across UK assets. So mid and small cap equities, that's the more domestically focused part of the equity market, jumped 3.2% last week, led by cyclical sectors, particularly energy, which was also supported by a rise in oil prices. But it wasn't just equities. The UK government bonds performed very well too, adding to an existing tailwind in the UK bond market at the moment. So, the ten-year yield fell from 4.75%, or it has fallen from 4.75% on the 9th of October. So earlier this month, down to 4.4%, at 4.43% today. And bond yields fall when prices rise.

00:05:07:18 - 00:05:11:11
Jane Parry
Okay. So when you say gilts have rallied but yields have fallen?

00:05:11:13 - 00:05:13:15
Tom Hibbert
Yeah. Bond yields falling is a good thing.

00:05:13:15 - 00:05:25:16
Jane Parry
Yields falling is a good thing. Okay. Right. So inflation's still high at 3.8%. Still above target. But we are seeing some cooling in certain sectors. So talk to me a little bit more about those.

00:05:25:18 - 00:05:52:23
Tom Hibbert
The big inflation driver in the last few years has been core inflation, really services. So that's things like more domestic demand wages and the core stickier components of inflation. And we're seeing more signs of cooling there, which is a better measure of the actual sort of fundamental, trend of domestic inflation, domestic price pressures in the UK.

00:05:52:24 - 00:05:58:11
Jane Parry
Is that because in the service industry primarily the cost base is people salaries?

00:05:58:17 - 00:06:25:21
Tom Hibbert
Yeah. Which is more entrenched isn't it. So the volatile components of inflation, things like energy and food go sort of up and down quite a lot. And there's volatility within services wage growth, things like that are more sticky. So that is often the measure that people look at. And particularly in the UK where services inflation has been so sticky in recent years, it's good news to see some evidence of further cooling there.

00:06:25:23 - 00:06:26:14
Jane Parry
Okay.

00:06:26:16 - 00:06:55:03
Tom Hibbert
So the risk from my perspective is that that calling in core inflation means that the risk of another flare up of inflation in the medium term has sort of faded a little bit. Certainly not off the table. It's not a negligible risk. We could have, you know, a fresh geopolitical issue arise, a spike in oil prices, whatever it may be. That could change the picture. But, you know, for now, it seems like the direction of travel has become a bit clearer.

00:06:55:06 - 00:07:02:23
Jane Parry
Okay. So apart from that, what else is contributing to this lower than expected inflationary outlook?

00:07:03:00 - 00:07:09:05
Tom Hibbert
The other thing I think markets are focusing on at the moment is the fiscal trajectory, the fact that…

00:07:09:10 - 00:07:12:05
Jane Parry
I.e. taxes, what taxes are going to come down the line.

00:07:12:07 - 00:07:39:04
Tom Hibbert
The outlook for growth. And, you know, is the UK economy stagnating? The fact that we have the government's quite one-dimensional policy approach at the moment, they seem to be very focused on simply raising taxes. And that is without sort of really looking at tackling a long term entrenched non-discretionary spending, and that's weighing on incentives to work, and incentives to invest.

00:07:39:04 - 00:07:42:21
Tom Hibbert
And it's creating a bit of negativity around the UK economy I think, which is feeding theme.

00:07:42:21 - 00:07:47:09
Jane Parry
Yeah. So in Halloween week, that might be the thing that's a little bit scarier maybe.

00:07:47:11 - 00:07:56:10
Tom Hibbert
Yeah, definitely a bit scary as topical. So, some economists argue that the UK might be on the wrong side of the Laffer curve.

00:07:56:11 - 00:07:88:02
Jane Parry
Oh, yeah. I've heard about the Laffer curve.

00:07:58:04 - 00:08:27:01
Tom Hibbert
So if you if you tax someone at 0%, you obviously raise zero revenue. If you tax someone at 100%, you also raise no revenue because you disincentivize work entirely. So the optimal tax point is somewhere between 0 and 100, which isn't really saying much, to be honest. But the idea is that even Arthur Laffer himself said that the UK is taxing itself to death, and that further tax hikes won't necessarily produce greater…

00:08:27:02 - 00:08:28:01
Jane Parry
Greater revenue for the government.

00:08:28:01 - 00:08:34:09
Tom Hibbert
Greater revenue for the government. In fact, it could produce lower revenue and slow down growth.

00:08:34:11 - 00:08:47:04
Jane Parry
So, we've covered what's been happening in the UK, the UK inflationary and economic environment. Is there a similar undershooting of inflation in the US? What's the story there?

00:08:47:06 - 00:09:16:06
Tom Hibbert
On the surface it's similar, but actually once you dig into it, it's quite different. So US inflation came in at 3%. It was just a touch below expectations. And not as big a surprise as what we saw in the UK. And also, it was the more stubborn services components, core inflation, that showed signs of easing. And that was enough to drive a strong equity market rally and also for the US government bond yields to fall as well. But the backdrop in the US is quite different from the UK.

00:09:16:07 - 00:09:17:18
Jane Parry
Okay. Go on, explain that then.

00:09:17:22 - 00:09:23:15
Tom Hibbert
So inflation is cooling, but the economy in the US is still running really quite hot.

00:09:23:19 - 00:09:25:04
Jane Parry
By hot you mean?

00:09:25:06 - 00:09:28:13
Tom Hibbert
Growth and earnings still very strong.

00:09:28:13 - 00:09:29:20
Jane Parry
So very different from the UK.

00:09:30:01 - 00:09:51:16
Tom Hibbert
Exactly. And the Federal Reserve is pointing to some weakness in the labour market. And that's what they're using to justify these rate cuts. But I actually don't see the same weakness. There are good reasons to explain some of the weakness that we've seen. For example, immigration has effectively gone to zero, so labour supply is a lot lower. That means that you need fewer job creations to maintain low unemployment. And the unemployment rate has still remained quite low. So, the evidence for labour market weakness is quite murky. The Federal Reserve meets this week, and they're widely expected to cut rates. They're almost certain to cut. And they're framing it as insurance against this, what they perceive as weakness in the labour market.

00:10:16:01 - 00:10:39:11
Tom Hibbert
But I think that the US is actually cutting into strength rather than weakness. And that means that it could risk rising, or stirring inflation again, which poses longer-term threat, particularly if the Federal Reserve is cutting rates under political pressure rather than a real economic justification for doing so.

00:10:39:13 - 00:11:51:10
Jane Parry
Okay. Understood. Right. Well, I think I should sum up what's in my Canaccord Halloween Takeaway coffee cup this week, definitely not a pumpkin spice latte. But what we've said is inflation in both the UK and the US are both still above target, but crucially lower than expected, giving markets a little bit of this inflationary sugar rush. In the UK, the situation is quite different from the US and this is partly as a result of a cooling economy, weaker demand, higher taxes, dampening momentum and work incentives. We think maybe the real Halloween trick could come in next month's budget. The government's, you know, tricks or taxes approach may end up squeezing growth without actually boosting revenues. And we are just wondering whether it's shaping up to be a bit of a ghoul Britannia. Let's hope the Chancellor's got those treats lined up, not just the tricks. All right. Thank you very much again for your time, Tom. I hope you enjoyed the Canaccord Coffee Break podcast, and we didn't scare you too much. But if you have any feedback, please do email us at Coffeebreak@canaccord.com and we'd love to hear from you. Thank you very much.

00:11:52:00 – 00:12:17:00
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.

00:00:11:17 - 00:00:21:00
Jane Parry
Hello and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I'm delighted today to be joined by Tom Hibbert from our Chief Investment Office. 

00:00:21:00
Tom Hibbert
Good morning, everyone. 

00:00:22:00 - 00:00:45.09
Jane Parry
Good morning. Morning. So, this episode, Tom, we are calling cockroaches because we are shamelessly borrowing from JP Morgan’s CEO Jamie Dimon. This week he warned that when you see one cockroach, there are probably more because when one settles into view, there are usually more hiding in the walls.

00:00:45:09 
Tom Hibbert
Possibly an infestation. 

00:00:46:00 - 00:01:36:00
Jane Parry
Possibly an infestation. Yeah. More to come on that. He was actually commenting on the recent bankruptcies of Tricolor, a subprime auto lender and First Brands, a car parts supplier, both of them in the US. But his message was pretty blunt. These failures might just be the first signs of deeper financial trouble. So today, we're asking, is history repeating itself? For those of you who are new to the podcast, the idea is to grab your earphones, grab a coffee, listen in for about the next ten minutes. We’re going to go into a little bit more detail on some of the subjects that we cover in our weekly markets review, but this week, particularly cockroaches. Before we get into the specifics of cockroaches, I’d just like to be a little bit sentimental with you, Tom. So, we've been doing this for a few weeks now.

00:01:36:00
Tom Hibbert
Let's get sentimental. 

00:01:36:00 - 00:02:08:06
Jane Parry
Let's get sentimental. The financial services market fell last week, despite strong results from the big banks and the VIX, the volatility index, which is something I learned last week, sometimes called the fear gauge, jumped to 28. None of that really means very much to me, so I'd like you to explain more. Why did sentiment rather than fundamentals drive that move last week and, sort of linked to that, why does sentiment matter so much sometimes more than data itself? 

00:02:08:06 - 00:03:02:00
Tom Hibbert
It's easy to assume that markets are purely rational. That prices reflect earnings, earnings growth, valuations and the broader sort of economic outlook of the economy. But in reality, particularly in the short term, it's sentiment that is the real driver of prices. So, when investors feel optimistic, they'll look through bad news. When they're nervous, they might look through good news. And a good gauge of that is this volatility index, which you mentioned. The fear gauge captures that mood. It's a measure of implied volatility of the US equity market. When the volatility index rises to between sort of 20 and 30, you start to feel the tension building a little bit. And then when it goes above 30 markets are in sort of fear mode 40, 50, 60. It's panic.

00:03:02:00 - 00:03:05:00
Jane Parry
Right. Okay. So at 28?

00:03:05:00 - 00:03:21:00
Tom Hibbert
At 28 there’s a little bit of tension, but it’s not panic territory at all. But it's just clear that investors have gone from complacent, as Richard spoke about a couple of weeks ago, to a little bit more cautious. 

00:03:21:00 - 00:03:45:00
Jane Parry
Okay. People are people with emotions, stresses, memories. I get that, that's understandable. People are sentimental. But these couple of U.S. bankruptcies have clearly rattled sentiment and, you know, caused people to be a bit nervous. Tricolor, if I pronounce that correctly, and First Brands both failed, but we've never heard of them here in the UK. So why are they so important? What's triggered that off now?

00:03:45:02 - 00:04:00:02
Tom Hibbert
No, so they're not really relevant for the bigger picture. It’s what's potentially lurking behind the curtains…

00:03:52:00 - 00:03:54:00
Jane Parry
Okay. The cockroaches 

00:03:54:00 - 00:04:41:00
Tom Hibbert
The cockroaches, that is now gaining a bit more attention. It's more of a narrative in the markets. So Tricolor subprime auto lender went under last month, but it is only drawing attention now because Jamie Dimon spoke about it during this JPMorgan call. He said when you see one cockroach, there are probably more. And, you know, JPMorgan had some exposure there. Then First Brands, an auto parts supplier funded largely by the private credit markets, which is also now in focus, they filed for bankruptcy. That's the second cockroach. So that combination. Tricolor, the subprime auto lender, subprime exposure, on the one hand, and then First Brands, private credit, private lending. It's that combination that's unnerved investors.

00:04:41:06 - 00:04:55:07
Jane Parry
So just remind us, subprime loan, subprime exposure, that’s a particular type of financial services market?

00:04:48:00 - 00:05:00:00
Tom Hibbert
They are lower quality borrowers. Borrowers with weaker credit profiles. They tend to feel the strain first when conditions tighten, when economy slows, they're often the ones to fall first.

00:05:00:09 - 00:05:03:00
Jane Parry
So they might not repay their debts to the likes of Tricolor.

00:05:03:00 - 00:05:14:00
Tom Hibbert
Exactly, so they're the canaries in the coal mine for a potentially broader default cycle. And what's under the microscope today is now sort of private credit. 

00:05:14:00 - 00:05:24:00
Jane Parry
Yeah. You mentioned the combination of subprime exposure and private credit a minute ago. Can you explain a little bit more about that, I don't really understand what private credit means.

00:05:24:00 - 00:05:41:10
Tom Hibbert
So private credit has exploded since the global financial crisis. As regulators have pushed banks to strengthen their balance sheets, reduce risk, a lot of that lending activity has moved away from banks outside of the traditional banking system into what's known as the shadow banking sector. It sounds like a pretty sinister term, but it basically just means non-bank institutions that are carrying out some of the roles that you would typically associate with banks. So private credit funds, hedge funds, in this case it's more private credit funds, providing loans, liquidity, like banks would typically do. But they're not regulated like the banks are. So private credit, to answer your question, it's effectively just direct lending between institutions away from the public bond markets. And it's grown from a tiny market in the noughties to close to $3 trillion today.

00:06:17:00 - 00:06:18:00
Jane Parry
So it’s a huge market.

00:06:18:00 - 00:06:28:00
Tom Hibbert
It's a huge market and it's grown parallel to the de-risking of banks since the global financial crisis, so many borrowers have now gone to the private credit markets for capital.

00:06:28:00 - 00:06:30:00
Jane Parry
And is that the company borrowers? 

00:06:30:00 - 00:06:37:00
Tom Hibbert
The company borrowers exactly. And the reason that they've done that, the reason there's attraction on both sides, is that for investors you can get higher yields.

00:06:37:09 - 00:06:43:00
Jane Parry
So you earn a higher return on the money you’re lending out.

00:06:43:00 - 00:07:09:00
Tom Hibbert
Exactly. And then for borrowers there's less red tape. So a private credit borrower can negotiate the terms of their loan with the lender directly and it's more customisable than issuing a bond in the public bond market. But from a macro perspective, where it gets a little bit more difficult for people like me who are trying to gauge what's happening and where the risks are, it's difficult to see where the risks are building because it's quite an opaque market.

00:07:09:02 - 00:07:11:00
Jane Parry
Yeah, it’s a murky world.

00:07:11:19 - 00:07:50:00
Tom Hibbert
It is. And even last week, head of the IMF Kristalina Georgieva, she said that it's the shadow banking system that's keeping her awake at night. So while the growth in the private credit market has helped bridge that gap as banks have stepped away and de-risked, it's also created this parallel system that isn't always as transparent or stress tested as traditional banks might be. But I think the key point is that banks themselves are not the problem today, particularly the large, well-capitalised ones with stronger balance sheets, more defensive lending books. If anything, they're actually part of the solution. And we've seen that during sort of different mini crises so far.

00:07:50:00 - 00:07:57:00
Jane Parry
Because of their strength. Whereas I guess there's a risk that some of this private credit could be a house built on straw a little bit more.

00:07:57:12 - 00:08:00:00
Tom Hibbert
That's right. Yeah, that's exactly right. 

00:08:00:00 - 00:08:07:00
Jane Parry
So just thinking about our clients and investors and their portfolios, should they be worried or is this just market noise? 

00:08:07:00 - 00:08:50:00
Tom Hibbert
It's more of a wakeup call rather than anything more sinister. The news caught quite a complacent market, which Richard spoke about a couple of weeks ago. But there's absolutely no sign of systemic stress. So, you look at even the regional banking shares which were hit last week, they recover towards the end of the week. They clawed back most of their losses. And you know, it's episodes like this which shows how sentiment can drive the prices in the short term. But the fundamentals can remain sound. And the big banks are really strong, highly capitalised, very robust. And as last week's earnings showed, they're still very profitable. And that strength I think is sustainable.

00:08:50:22 - 00:08:56:00
Jane Parry
So it's the private credit and shadow banking issues that we should be watching closely. 

00:08:56:00 - 00:09:04:00
Tom Hibbert
Yes. But there's no evidence yet of any systemic risk. And there's certainly no evidence of an infestation of cockroaches if you like.

00:09:05:24 - 00:09:30:18
Jane Parry
Nice, Tom. Like it. Right then. Very interesting. Again, let me have a little sum up about what's in my Canaccord takeaway coffee cup today. So, we got all sentimental, and that market sentiment can move prices as much if not more than fundamentals on occasion, we talked about a couple of cockroaches, whether they're warning signs. But for now, you said no evidence of a wider infestation, which is good news. Larger European banks remain strong, robust and profitable. We don't believe the system is broken, but actually a very similar takeaway to the last few weeks about staying alert, not being complacent and, you know, really keeping an eye on what is going on in the wider markets. I was reminded actually, as well of that great movie. Do you remember the Big Short?

00:09:53:08 - 00:09:54:00
Tom Hibbert
Of course. Yes. 

00:09:54:00 - 00:10:04:00
Jane Parry
Loved it. Christian Bale brilliant. And how risky lending can get packaged up. But banks today are far better capitalised, much more resilient than that, from what you said. 

00:10:04:00 - 00:10:12:00
Tom Hibbert
Yeah, that's right, that's right. And just on sentiment, sentiment tends to be the driver over the short term. Over the long-term markets tend to be rational.

00:10:12:20 - 00:10:28:24
Jane Parry
Good nudge. So, thank you very much. My coffee has definitely gone cold today. I hope you enjoyed the coffee break podcast today. Any feedback, any questions, please do email us. Coffeebreak@canaccord.com. Thank you very much. I look forward to next week.

00:10:28:24 - 00:10:55:02
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.

00:00:09:10 - 00:00:21:00
Jane Parry
Hello 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 Tom Hibbert from our Chief Investment Office. 

00:00:21:00
Tom Hibbert
Morning, everyone. 

00:00:22:00
Jane Parry
Morning, morning. 

00:00:23:00
Tom Hibbert
Good to be here. 

00:00:24:00 - 00:01:30:00
Jane Parry
The idea behind this podcast, if you've not listened to us before, is to have a little chat based on our weekly markets review that we send out to subscribers on a Monday weekly, and just get into some of the more interesting areas in a little bit more detail, really to try and make them more accessible and help people understand what it is we're talking about and thinking about. So, the idea is grab a coffee, plug in your ears and listen to us for about the next ten minutes to find out a little bit more about what's going on the markets. This week, Tom, we are going to follow up on the conversation I had last week with Richard Champion when we were talking about not being complacent and being extra vigilant about what's going on in the world. And this week gave us a really good real-life example for that extra vigilance when we saw the US-China trade spat, and that was an external trigger that impacted the markets. So on Friday the markets finally stumbled as trade tensions reignited between the US and China. I think global equities fell about 2.1% altogether last week.

00:01:31:00 - 00:01:32:02
Tom Hibbert
Yeah that's right.

00:01:32:04 - 00:01:44:05
Jane Parry
So I just wanted to know from you sort of why now, what's kicked off this spat at this particular point in time. Because this sort of underlying uneasy truce has been going on for quite some time. So, what's kicked it off? 

00:01:44:00 - 00:02:24:00
Tom Hibbert
Sure. So since mid-April, equity markets have really recovered off the back of some trade agreements. And there was a big trade agreement, or at least the shell of an agreement, between the US and China. And the two countries have, you know, been operating on good terms since then. But they still had a lot of negotiating to do. And there was a meeting scheduled for the end of this month between President Trump and XI Jinping. And running into that, China decided to turn the screws up a little bit last week. They're very dominant in rare earth’s mining and processing. So China account for about 70% of rare earth’s mining, 90% of processing.

00:02:24:13 - 00:02:26:10
Jane Parry
And rare earth’s mining - that's?

00:02:27:00 - 00:02:35:00
Tom Hibbert
Many of the raw materials that are very important for national security, military technology and things for AI.

00:02:35:00 - 00:02:40:00
Jane Parry
Okay. So for processors or data centres or whatever.

00:02:41:00 - 00:02:44:00
Tom Hibbert
Yeah, exactly. So after that, Trump reacted very aggressively.

00:02:44:00 - 00:02:46:00
Jane Parry
Yeah. As is his style, I guess.

00:02:46:00 - 00:03:13:00
Tom Hibbert
As is his style. First, he threatened to pull out of the meeting at the end of the month altogether. And then he also put 100% tariffs on all Chinese imports, to come into effect on the 1st of November. And he also put controls on critical software exports to China as well. So it was Trump's reaction that raised the heat up even more. That triggered the volatility on Friday.

00:03:13:00 - 00:03:19:00
Jane Parry
So really a bit of posturing by both sides going into the talks, and that's why it’s happened at this particular time.

00:03:19:00
Tom Hibbert
That perhaps unnecessarily raised the tensions.

00:03:20:00 - 00:03:48:00
Jane Parry
Yeah. Understood. So, the cynic in me would say that China has been working towards this degree of control over the Western world for years and really making us and all of the tech companies, I guess, dependent on their rare earth resources and their processing capabilities. So how does this play into this sort of more macro environment and the move away from globalisation and interdependency on other nations?

00:03:48:04 - 00:04:08:00
Tom Hibbert
I think they have to, I mean the two countries have become totally reliant on one another. I think particularly that's ramped up since China joined the World Trade Organization in 2001. They joined with very favourable trade terms. And global trade flows have now become very asymmetric.

00:04:08:00
Jane Parry
Asymmetric, meaning?

00:04:09:00 - 00:04:31:00
Tom Hibbert
Meaning basically the US spends and consumes and China manufacturers and saves. And that makes the US vulnerable in terms of its supply chains, manufacturing reliance on China, and China is also reliant on that US investment as well. It supports their economy. So, it's a two-way thing and it's not sustainable or sensible really either way

00:04:31:21 - 00:04:32:00
Jane Parry
Because neither of them trusts each other. 

00:04:32:00 - 00:05:29:00
Tom Hibbert
Exactly. And it's one of the reasons why ultimately, I think de-escalation is likely for now. We're already seeing a bit of that, although it's certainly not resolved. But it was obvious early in the year when the two countries were mudslinging, when the trade war first was escalating, it became immediately apparent just how much damage they could do to one another. Both sides have thresholds. So the US could raise tariffs by too much and then it just hurts themselves. They can shoot themselves in the foot. It might not produce additional revenue. It can have negative effects on their economy. And then China as well, they don't want to get into a trade war with their economy. They're struggling with domestic demand and deflation, so it's a bad time for both countries. And altogether, although there is a risk that this escalates further, I think both sides have an imperative and a drive to avoid those pain thresholds that they have and de-escalate

00:05:29:03 - 00:05:32:21
Jane Parry
And vested interest, I guess, in de-escalation. 

00:05:32:21 - 00:05:40:00
Tom Hibbert
Exactly. And while China has a higher pain threshold politically, their economy is arguably on a more fragile footing, so it kind of balances things out.

00:05:40:21 - 00:05:53:00
Jane Parry
So let's get back to the markets and in particular the US tech market. What was the impact of this spat on their valuations in the short term? And what do you think about the long-term outlook?

00:05:53:00 - 00:06:23:00
Tom Hibbert 
So the most severe impact was on the areas most affected as you would expect. So US tech fell 4% on Friday. Chinese equities also fell about 2.3%. And also, you know, given the broader implications of escalating trade tensions, it was sectors that are more tied to the economic cycle. So sectors that underperformed, so consumer discretionary.

00:06:24:00 - 00:06:26:00
Jane Parry
Consumer discretionary - what does that mean? 

00:06:26:00 - 00:06:30:00
Tom Hibbert
Those are consumer sectors where they don't need them

00:06:30:23 - 00:06:32:00
Jane Parry
So discretionary spend.

00:06:33:00 - 00:07:50:10
Tom Hibbert
Discretionary spending rather than consumer staples where you actually you need it. And that's more defensive. So those defensive sectors: healthcare, utilities, consumer staples all performed, all held up pretty well. I think the impact of this was that it’s on the back of a few months of very strong equity market performance. So it reminded investors that those downside risks to equities are there, after a few months of very strong gains. You look at the fear index, the fear gauge, the VIX which is a measure of uncertainty and volatility in equity markets - that spiked last week and remains a little bit elevated. That I think shows that the equity market is on a little bit more fragile footing at the moment. But altogether, you know, it's only a small stumble. The bigger picture is still very much the same. And the one that Richard painted very eloquently last week that, yes, valuations are stretched in places, but they are supported by a very solid backdrop, a solid earnings backdrop, a solid policy backdrop. And those valuations can be supported as long as those fundamentals remain strong, as long as the earnings growth is there and as long as the economic environment remains benign, and so far, that that still seems to be the case.

00:07:50:15 - 00:08:25:00
Jane Parry
Okay. Thank you. So let me sum up what's in my Canaccord takeaway coffee cup this morning. So markets are still generally continuing on their upward trajectory. They can be vulnerable if something external triggers it. And the US-China trade spat is one such reminder. But only a little small spark, little small spat that just reminds us that we need to continue not to be complacent. Indeed, we need to be alert to these shocks. And as you remind us, and Richard Champion reminded us last week, that's the main takeaway really: stay invested, stay balanced and stay awake.

00:08:25:12 - 00:08:29:11
Tom Hibbert
Yeah, balanced, diversified and flexible. Is that what Richard said last week?

00:08:29:11 - 00:08:38:00
Jane Parry
He did say that. I get key messages coming out of the Chief Investment Office, it’s brilliant. All right. Thank you very much indeed. Thank you for your time. Looking forward to speaking to you again next week. 

00:08:38:00 - 00:08:40:00
Tom Hibbert
Thank you. Thank you everyone.

00:08:40:11 - 00:09:06:23
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.

00:00:09:05 - 00:00:27:03
Jane Parry
Hello and welcome to the Canaccord Wealth Coffee Break podcast. I'm Jane Parry, and I'm the Chief Marketing Officer here at Canaccord Wealth. I am delighted to be joined today by Richard Champion, special guest star, who is our Co-Chief Investment Officer. So welcome Richard.

00:00:27:03 
Richard Champion
Thank you very much Jane.

00:00:28:00 - 00:00:31:00
Jane Parry
And the first things first, the most important thing is what is your coffee of choice?

00:31:00 - 00:00:45:00
Richard Champion
Well, I've been changed a little bit. I'm just back from a family wedding on the Algarve. And I've had a lot of very strong espressos. And so, I've changed from my normal Americano to an espresso.

00:00:45:00 - 00:00:48:00
Jane Parry
That might explain why you're looking very sprightly this morning then.

00:00:48:00 - 00:00:50:00
Richard Champion
I'm looking very, very sprightly. Thank you.

00:00:51:00 - 00:01:48:00
Jane Parry
So, as you may know, the idea behind this podcast is to take a look at our weekly markets review that we send out to subscribers on a Monday weekly and dive a little bit deeper into some of the more interesting areas to get a better understanding of what the Chief Investment Office is thinking. So without further ado, grab a coffee and listen in for about the next ten minutes, and let's hear a little bit more about what's going on. So, this week, Richard, global equities have pushed higher and higher and are now reaching all-time highs. In my mind as a sort of normal investor if you like, they seem to be overly optimistic and missing some of the issues, like the latest resignation of the Prime minister in France, the US government shut down, changes in US employment figures. So I'm just wondering, is there just a disconnect there? Why are the markets so comfortable and is their optimism justified? 

00:01:48:00 - 00:02:39:00
Richard Champion
Yes. Markets hitting all-time highs isn't necessarily an unusual thing. In normal times, it happens several times a year. And that's because the economy tends to grow over time, and with the economy, so do corporate earnings. So the equity market hitting all-time highs per se isn't unusual. Perhaps what's unusual is the strength of the equity markets. Because obviously if markets are going up faster than corporate earnings, then the valuation of the overall market has got bigger. And that's where, perhaps, there is a little bit of complacency in markets particularly centred around the technology sector, where everyone's very interested in AI. So that's where the core concerns are for equity investors: perhaps the market's getting ahead of itself.

00:02:39:00 - 00:02:50:00
Jane Parry
Okay. So pretty positive. But this just feels counterintuitive to me. Could the valuations themselves be a problem if they are too high? 

00:02:50:00 
Richard Champion
I'm quite an old person.

00:02:54:00
Jane Parry
No one would ever say that of you Richard.

00:02:55:00 - 00:03:40:00
Richard Champion
I've been through almost 40 years of market cycles. And yes, sometimes valuations can be an issue. Perhaps the best examples are in 2000, when the tech bubble burst, and in the global financial crisis where valuations on both occasions were very elevated and in themselves were a cause for concerns when other factors came on board to attack those valuations. High valuations can be sustained if you're in a very stable environment. And perhaps that's where we are now. But there's a lot of complacency around that topic right now. 

00:03:40:00 - 00:03:50:00
Jane Parry
So going back in history because I'm quite an old bird as well, what were those other factors that caused the sudden sort of downturn in the markets back in history? 

00:03:50:00 - 00:04:58:00
Richard Champion
So in the tech bubble of the late 90s, early 2000s, the chair of the Fed, Alan Greenspan at the time, had said in 1996, so many years before the bubble burst, that the market was irrationally exuberant, by which he meant that valuations were too high for fundamentals. But we had a number of events in the late 90s where you had an emerging market crisis. Russia defaulted on their debt, you had a very large hedge fund blow up, which caused the fed to cut interest rates. But by the end of 99, they had to start raising interest rates. And raising interest rates was what triggered the flight from technology stocks at the time. And that's what caused that bubble to burst. So the outside element was the fact the economy was growing too strongly, and the Fed had to raise interest rates to tamp down on that growth. 

00:04:58:00 - 00:05:06:00
Jane Parry
So this time around, obviously the Fed just reduced interest rates. Can you just explain the difference in that situation compared to now?

00:05:06:00 - 00:05:40:00
Richard Champion
Yeah so the Fed had to reduce interest rates for one primary reason. They've got what's called a dual mandate, which is price stability and effectively keeping full employment. Price stability, you can have a discussion about. Inflation in the US is slowly increasing, not nearly as badly as it is in the UK, but the employment markets hit a soft patch basically from the end of April certainly until the end of August. We've hit a real soft patch.

00:05:40:00 - 00:05:42:00
Jane Parry
Soft patch - that means fewer people employed?

00:05:42:00 - 00:06:17:22
Richard Champion
Fewer people are getting employed. In fact, in one month they had a negative number of new employments. People were net losing their jobs. So the Fed does have this dual mandate. It had to look at that and say, what should we do to try to counter that? Despite the fact they are nervous about inflation because of the impact of tariffs, they still cut those rates. Now the market thinks we might get another five or even six interest rate cuts. I think that's probably too optimistic. But I think we'll still get 1 or 2 more because we've got this uncertainty about the employment market.

00:06:17:22 - 00:06:25:00
Jane Parry
Okay. So, we've talked about equities being at an all-time high. Last week we talked about gold being at an all-time high.

00:06:25:00
Richard Champion
It's got higher since.

00:06:26:00 - 00:06:36:00
Jane Parry
Yeah of course it has. So, the other element I guess is what we call in the weekly markets review the credit markets. In my world that's bonds and gilts.

00:06:36:00 - 00:07:19:00
Richard Champion
Yeah. So just to be clear, credit markets are company bonds and gilts and treasury bonds are government bonds. So company bonds have been doing very well recently and for many years actually. In the old days you would have said, well, if the difference you're paid in terms of higher interest on your company bonds gets too small compared with government bonds, you need to think very carefully about whether the company bonds are good value, because governments generally don't default. Companies can go bust.

00:07:19:00 - 00:07:31:00
Jane Parry
Say that to me again. So if the interest you're paid for lending money to a company is only slightly more than lending money to a government, you would lend money to the government via a gilt or a treasury?

00:07:31:00 - 00:08:11:00
Richard Champion
Normally. That's right. And right now, the difference isn't that big. In fact, in many measures it's the lowest it's been for decades. The smallest gap. So you don't get a big premium for lending money to companies compared to lending money to governments. Now there's a very good reason for this, which is quite simply that governments since Covid have been borrowing enormous amounts of money, whereas companies are actually in quite good nick financially. So there's a reason why that is there, that small difference is there. And we think it's still sustainable because of their relative financial strength.

00:08:11:00 - 00:08:19:00
Jane Parry
So, just thinking about our clients and investment portfolios, the mix of equities and company bonds?

00:08:19:00 - 00:08:20:00
Richard Champion
Correct, and some government bonds as well.

00:08:20:00 - 00:08:26:00
Jane Parry
Yeah. We still believe in that diversified approach.

00:08:26:17 - 00:08:56:18
Richard Champion
Equities feel to us like they're fairly fully valued but justifiably so. And, rather concerningly in some ways, bonds also look fairly fully valued but justifiably, so we want to have both. We are more vigilant than we have been for a number of quarters right now because valuations are quite high. But at the moment we can't identify that trigger, that rising interest rates or whatever the trigger is, that will sort of spoil the party.

00:08:56:19 - 00:09:42:14
Jane Parry
Right. Thank you very much. Thank you for your time. I think I just need to sum up what's in my Canaccord takeaway coffee cup today. So markets are flying high, both equities and bonds, particularly corporate bonds we talked about. Even as the world feels fairly wobbly to the rest of us, you know, political crises, French prime ministers coming and going, bonds are definitely making a comeback. So we are sort of asking, is this naïve optimism just denial? But actually, at the moment we're watching this space very carefully, just to see if there are any of those external triggers that might cause this to change, like you were talking about back in the day, in the year 2000.

00:09:42:22 - 00:10:06:20
Richard Champion
We have to be very alert to that. And as I said, vigilant. We have three words we like to describe our approach as, which are balanced, which is where we are balanced between equities and bonds, dynamic, ready to move if need be and flexible in our mindset. So, if the events underscoring markets change, we need to change our views too. At the moment, we don't see a need to.

00:10:06:22 - 00:10:13:21
Jane Parry
Okay. Brilliant. Thank you so much for your time and I hope to see you again on the podcast.

00:10:11:00
Richard Champion
Thank you very much. 

00:10:13:00
Jane Parry
Thank you.

00:10:13:21 - 00:10:40:24
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.

00:00:09:13 - 00:00:14:13
Jane Parry
Hello and welcome to the Canaccord Wealth Coffee Break podcast. I'm Jane Parry, and I'm the Chief Marketing Officer here at Canaccord Wealth and I am joined today by Tom Hibbert from our Chief Investment Office. Welcome. 

00:00:23:00
Tom Hibbert
Hello, everyone. 

00:00:24:00 - 00:00:38:00
Jane Parry
Now, Tom and I have got a slight disaster this week because we normally sit here with a couple of black Americanos, fully caffeined up, ready for our conversation. The Canaccord coffee machine is not working this week. So, what have you gone for? 

00:00:39:00 - 00:0051:00
Tom Hibbert
Total disaster. I've had to go for instant coffee, and the worst thing is my daughter was teething last night and I've had about three hours sleep, so, instant coffee does the job, but it's not quite the same, is it? 

00:00:51:00 - 00:02:08:18
Jane Parry
I've gone for tea. I'm not sure what's best. Instant coffee or tea? It's just not cutting it though. But we'll try our best. We'll try our best to get through this podcast today. So, as you know, this is based on the Weekly Markets Review, which is a newsletter we send out to subscribers every Monday each week. And what we do on the Coffee Break podcast is dive into some of the themes in a little bit more detail just to get a better understanding from Tom about what's going on in the markets. So please grab a coffee if you can and listen in for about the next ten minutes and let's hear more about what's going on. This week's conversation has been triggered by gold, which is booming to all-time highs as we speak. So gold is up 47% year to date. And silver is performing well too, up 60%. And all of this is as the US is facing its debt ceiling crunch time once again this week. So first off, Tom, what do we mean by the US escaping structural decline? I thought from our conversations in the last couple of weeks actually, that the US was doing well. Markets seem to be doing well for sure. So, what is going on here?

00:02:08:18 - 00:02:36:11
Tom Hibbert
Yes. The US economy is doing quite well and US companies are doing extremely well. So, in fact, that could be the saving grace for what we're going to talk. 

00:02:19:00 - 00:02:21:00
Jane Parry
Because last week we talked about fabulous earnings, didn’t we?

00:02:21:00 - 00:02:36:12
Tom Hibbert
Exactly. Yeah, exactly. The issue is debt. The US has racked up a $37 trillion debt pile, thanks in large part to extreme policies and entrenched excessive spending over the last 15 years in particular.

00:02:36:12 - 00:02:39:00
Jane Parry
So this is the US government, not companies.

00:02:39:00 - 00:03:15:00
Tom Hibbert
The US government. Exactly. And many other countries, developed countries are in the same boat. Worse positions actually, because they don't have the same quality companies, like the UK, for example. But to understand what's happening here, I like to go back to the 18th century. There's an 18th century Scottish Enlightenment thinker, philosopher Adam Fergusson. He warned in the 18th century of the risks to nations of excessive debt. And in fact, you know, he spoke about how that was the most significant predictor of structural decline for great powers. And you can apply that throughout history. 

00:03:15:00 - 00:03:17:00
Jane Parry
Okay, which makes sense. 

00:03:17:00 - 00:03:48:00
Tom Hibbert
Yeah. And you see it, you know, notably the British Crown try to tax the Americans. And then you had no taxation without representation. The Boston Tea Party and the American Revolution. You had the French Revolution when the church and the first estate, the second estate tried to put these crushing taxes on the Third Estate and in particular the bourgeoisie, the very bloody French Revolution stemmed from that. And then you have the slow decline of the British Empire after two very costly world wars. So, there's an economic historian, Neil Ferguson - 

00:03:49:19 - 00:03:52:00
Jane Parry
No relation to Adam Ferguson from the 18th century. No?

00:03:52:00 - 00:04:19:00
Tom Hibbert
I don't think so. They’re both Scottish though. Neil Ferguson has repopularised the work of Adam Ferguson and come up with Ferguson's law, which he says is named after Adam rather than himself. But the law states that any country that spends more on interest costs than defence has crossed a tipping point of structural decline. So the US violated that law, Ferguson's law, for the first time in modern history last year. 

00:04:19:00 - 00:04:43:20
Jane Parry
Okay, so let me just understand that. So, Ferguson's law says that if a country spends more on its debt’s interest costs than it spends on defence, defence spending, it has crossed the tipping point of structural decline. So how has the US administration reacted then to effectively seeing their nation tip over into structural decline?

00:04:43:20 - 00:05:05:15
Tom Hibbert
So it's fascinating. So, Elon Musk went on Fox News before he teamed up with Trump. And he said, you know, we violated this law. We need to do something about excessive government spending. We need a smaller government. We effectively need to audit the government. And we need government efficiency. So you had the departments of government efficiency, the doge. Well, that that bromance lasted about as long as a primary school relationship. And with the collapse of that bromance, you also had the abandonment of any talk of austerity and fiscal conservatism. Now you have the fiscal taps wide open. Pedal to the metal. The plan is to outgrow the debt. And that's why I say it's the economy and those great companies that that could provide the saving grace. If productivity is enough to outrun the debt, then everything is fine. And lower interest rates obviously help with that, which is why Trump is putting so much pressure on the fed. But it's a risky strategy. And if it fails, you then have, the plan morphs again into the last resort of bankrupt governments, which is this universal tax of inflation.

00:05:51:08 - 00:06:22:23
Jane Parry
So this sounds like there's three phases of this US macro government. 

00:05:58:00 - 00:06:00:00
Tom Hibbert
Yeah. Morphing strategy. 

00:06:00:00 - 06:22:00:00
Jane Parry
Morphing strategy. So first they were pretty fiscally conservative. Now they're trying to outrun the debt, but that could morph into a third phase, which is around inflating it away. That's quite a lot going on. So what are the implications for our clients, for investors then?

00:06:23:00 - 00:06:55:02
Tom Hibbert
Sure. So I suppose a way to look at it is financial repression. 

00:06:26:00
Jane Parry
Financial repression? 

00:06:27:00
Tom Hibbert
Yes. Taxation without legislation. So low interest rates, higher inflation. Maybe you have more quantitative easing. Currency devaluation. There are lots of different guises that this can take. But ultimately, as Keynes said, and I'm quoting him here, by a continuing process of inflation, governments can confiscate secretly and unobserved an important part of the wealth of their citizens.

00:06:55:04 - 00:07:00:00
Jane Parry
So is it all this that’s driving people to gold? 

00:07:00:00 - 00:07:11:00
Tom Hibbert
Absolutely. It is. At least a very significant part of it is. The rally in gold is about far more than just gold itself. It's about fiat money. 

00:07:11:00 - 00:07:14:00
Jane Parry
Fiat money. Not the car company. 

00:07:14:00 - 00:07:25:00
Tom Hibbert
Not the car company. But when a government can issue its own currency. And, you know, gold is arguably the truest form of money - 

00:07:25:00 - 00:07:27:00
Jane Parry
Because it's not issued by a government. 

00:07:27:00 - 00:08:15:00
Tom Hibbert
It's not issued by a government. It can't be debased in the same way. It's untethered to central bank policies. It's outside of that what's called fiat system. So it can't be printed. But what we're seeing today is central banks, sovereign wealth funds, not just private investors, but we are seeing private investors, all diversifying away from the US dollar and buying gold and looking for assets that provide protection against fiscal erosion. So there are other assets that do that as well. And it's important, I think, to have a thread through your portfolio that provides protection against this risk that is very relevant today and at the moment. 

00:08:15:00 - 00:08:25:09
Jane Parry
So you mentioned that this is a threat, a gold threat indeed, that can run through a portfolio. But what other strategies are there then beyond gold or beyond silver?

00:08:25:09 - 00:09:40:00
Tom Hibbert
Sure. So Oxford University released a paper in 2021 that showed that there was no specific commodity that works all the time. But a broad basket approach to commodities is the best way to hedge against inflation. So that's one, broad basket of commodities. Then there's inflation link bonds, which I think are attractively valued at the moment. Longer dated inflation linked bonds where there are very attractive yields on offer, can protect against this scenario. So if you look at the US and UK inflation linked bonds, you can earn a 2% real yield. That means you can earn whatever inflation is plus 2% a year over the lifetime of the bond. You have to accept a lot of volatility. But if you do hold them over the long term, that is the return that you that you will earn. And I think that's quite compelling. Then you have other alternative diversifying strategies as well, which are key components, you know, away from traditional assets of just bonds and equities. There are other strategies that that you can trade there. And even within those traditional asset classes, there are specialist areas of equities and credit that can provide protection, whether it's mining shares or within fixed income, asset backed securities.

00:09:40:02 - 00:10:39:00
Jane Parry
Okay. Thank you. Well, in my, takeaway coffee cup, this is what I've gleaned today. I've enjoyed our little trip into history of Ferguson's Law and also the nice Keynes quote that you made. I understand the US is currently trying to outrun its debt and interest costs through growth and stimulus, and this looks feasible, because of the innovation that's going on in the US and, and the very successful companies out there. But overall, I think my takeaway was against this fiscal backdrop and inflation uncertainty. There is a definite threat to the erosion of wealth. You know, we talk about it being the robber in the night, inflation. So thinking about how to invest and broaden your portfolio to provide protection against inflation is absolutely key going forward, I think. Maybe there's a bit of a gold rush, but other things are available. Is that right? Have I got that right? 

00:10:39:00 - 00:10:40:00
Tom Hibbert
Bang on, that’s perfect. 

00:10:40:00
Jane Parry
Great. So thank you very much. My not such a great cup of tea has now gone cold, but thank you for listening to the podcast and we’ll speak to you again next week. 

00:10:49:00
Tom Hibbert
Thank you very much. 

00:10:50:00
Jane Parry
Thank you.

00:10:50:20 - 00:11:12:23
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.

00:00:09:15 - 00:01:30:14
Jane Parry
Hello and welcome to the Canaccord Wealth Coffee Break podcast. I'm Jane Parry and I am the Chief Marketing Officer here at Canaccord Wealth. I'm joined today by Tom Hibbert from our Chief Investment Office. We're sitting here with a couple of black Americanos all caffeined up, ready to go. So, the idea behind this podcast is to have a look at our weekly Markets review, which is a newsletter we send out on a Monday every week to subscribers. And to deep dive into some of the more interesting areas in that weekly markets review, just to get a bit of a deeper understanding of what's going on. So grab yourself a coffee and let's get into this for about the next ten minutes. So this week, Tom, we are talking about global equities. But primarily what's happening in the US as that is the biggest market that dominates global equities. And I understand it's defying its usual September seasonal weakness. And we've seen an unusually strong uptick in valuations of 3.4% in September so far. That's in sterling terms. Across US large, mid and small caps all hitting record highs. So can you just give us a bit of background to that. What's going on in the in the markets and what's made this happen?

00:01:30:14 - 00:01:57:01
Tom Hibbert
Yeah, sure. Hi everyone. So September does seem to have a bit of an effect on investors. It's historically been the weakest month for markets. It's a bit of a statistical anomaly, really, I would say a back-to-school impact, perhaps. This year, though, it's been totally the opposite. We've seen a very strong rally, almost a melt up in equities -

00:01:55:00 - 00:01:57:06
Jane Parry
A melt up in equities, okay, like it.

00:01:57:06 - 00:02:27:21
Tom Hibbert
Particularly in the US. And what's driving that is this fabulous earnings backdrop. The corporate landscape is particularly strong. 

00:02:06:00 - 00:02:10:00
Jane Parry
Okay. So what elements of the landscape are particularly strong then?

00:02:10:00 - 00:02:43:00
Tom Hibbert
I mean just profitability. Company earnings and the earnings growth look very compelling as well. So earnings, earnings growth, forward earnings expectations reached a new high last week at the same time as those indices did. And it's also been a broad rally. So performance in the US equity markets has for the last few years really this decade been extremely narrow. And we're now starting to see a broadening out across the market, from large to small companies. 

00:02:43:00 - 00:02:46:00
Jane Parry
So that's going to be a positive, yeah?

00:02:46:00 - 00:03:12:00
Tom Hibbert
100%. And you also have at the same time a very productive policy backdrop. So tax cuts in Trump's big, beautiful bill, deregulation alongside just the fact that the US seems to have abandoned the sort of fiscal conservatism, austerity narrative that they had at the start of the administration. And they're just spending tons of money. So there's a lot of fiscal stimulus at the same time. 

00:03:12:00 - 00:03:30:00
Jane Parry
Okay. So let's just pick up on a couple of things. You talked about forward earnings, and you also talked about the Mega Caps or sometimes we talk about the Magnificent Seven, don't we. How does that sort of translate across the whole market to that growth that we've been seeing?

00:03:30:00 - 00:03:50:05
Tom Hibbert
So just on the dominance of the magnificent Mega Caps or the Magnificent Seven. Actually, look, we'll look at the top ten stocks in the US they have been responsible for over half of the equity market’s performance this decade. And they now make up about 40% of the market.

00:03:50:05 - 00:03:52:00
Jane Parry
Oh my gosh it's massive, isn’t it?

00:03:52:00 - 00:04:24:00
Tom Hibbert
So it’s a huge concentration of the US equity index now dominated by big tech effectively. What's promising today is that the earnings landscape seems to be broadening out, beyond the top end of the market. So by the middle of next year, analysts see earnings growth of 30% for the mid caps and 20% for large caps. So those are big numbers, good growth across the markets but particularly strong growth for mid and smaller companies, which is promising. 

00:04:24:00 - 00:04:42:18
Jane Parry
I think people are also drawing a bit of a comparison of the valuation of those companies with the late 1990s in the tech bubble. Is that a valid comparison, do you think, and are US equities overly expensive today?

00:04:42:18 - 00:05:18:14
Tom Hibbert
Yes. It's true that the market is expensive. It's undeniable. And so the whole market is trading on a price to earnings ratio. That ratio is at 23x, which is just shy of the peak of the tech bubble of 25x. Now that's skewed by the top end of the market. The Magnificent Seven. Those tech related firms which continue to be magnificent. So they are up 60% from the lows in April. And that compares to 35% for the wider market excluding those seven stocks. 

00:05:18:14 - 00:05:29:00
Jane Parry
Just explain that to me in a little bit more detail. So you say they're up by 60% since April. 

00:05:29:00 - 00:05:36:00
Tom Hibbert
The share prices of the Magnificent Seven. They’re up 60% versus 35% for the wider market.

00:05:36:00 - 00:05:38:00
Jane Parry
So they've risen really quite a lot even this year.

00:05:38:00 - 00:06:23:07
Tom Hibbert
On a valuation perspective, if you exclude the top end, those Magnificent Seven stocks, the rest of the US equity market is trading on about 21x earnings. Still high, still expensive. What's different though today from back then is the earnings backdrop. It's very, very solid, fabulous from a corporate landscape. It's just very, very strong. And also, the policy environments as well which I mentioned. So last week if we just look at monetary policy as well, last week markets were also supported by the resumption of rate cuts from the Federal Reserve. So the fed cut rates for the first time this year. And we should probably talk about that in this conversation as well.

00:06:23:07 - 00:06:38:00
Jane Parry
Let's talk about the fed then and the recent fed rate cut. First time this year that they've cut rates. It seems we've been talking about too slow Powell for weeks now. So, what's happened in the last week or so and how is that impacting markets?

00:06:38:00 - 00:08:32:00
Tom Hibbert
So the fed cut rates, as was expected. And they justified that through the slowdown and the softening of the labour market that we've seen. And also, the fact that inflation momentum isn't there at the moment. So remember monetary policy as well. It has a lagged effect. So the feed through into the economy isn't instantaneous. It's delayed. So partly the central bank is cutting interest rates now on the expectation that high interest rates have already had their impact on the economy. So they have to be more forward looking. So cutting now is right on balance, I think. And there are people who are deeply concerned about the labour market and the revisions that we've seen from the Bureau of Labor Statistics, which has changed the narrative on the labour market, but in particular in more recent times, the fall in job growth and the slowdown in job creation in the US. But in my view, I think that's a bit of a red herring, really, because immigration and particular illegal immigration has dramatically fallen. So I think the fact that we have lower job growth in the US, while unemployment has actually stayed very low, that reflects the fact that labour supply has in fact fallen. So fewer new jobs are required to keep unemployment low. And if that's the case, then weaker job growth may not be a sign of weakness at all at the moment. And it's more of a sign of the fed having actually achieved what it's set out to by hiking interest rates in the first place, which is to take the heat out of the economy, take the heat out of the labour market to see wage growth coming down and without the economy crashing, without having a big spike higher in unemployment. So I think that what we're seeing at the moment is more healthy, more of a healthy slowdown that has facilitated this rate cut. 

00:08:32:00 - 00:08:41:00
Jane Parry
So, very briefly because I think we’re nearly out of time – we’ve talked about US global equities, what about the impact on US bond markets?

00:08:41:00 - 00:09:03:00
Tom Hibbert
So it’s rare to see bond yields rise following an interest rate cut, and that’s what we saw last week, and it’s a familiar pattern for this year actually. The bond market has voiced scepticism over whether inflation has been fully tamed. So, we saw that last week with the yield curve doing what’s called bear steepening -

00:09:03:00 - 00:09:05:00
Jane Parry
Bear steepening.

00:09:05:00 - 00:10:13:00
Tom Hibbert
Where long-dated yields rise more than short-dated yields. So the yield curve is steeper. And remember, bonds prices are inverse to bond yields. So when yields rise, bond prices are falling. So the long-dated bonds in the US fell last week. The US 30-year yields climbed quite sharply to 4.7%. And, as I say, that steepening is a familiar pattern. It reflects the caution that markets have of a potential policy misstep from the central bank here, and that the market isn't convinced that inflation has been fully tamed. It also reflects the ongoing fiscal profligacy of the administration. So the fact that the government is spending lots, their main strategy is to drive growth, to continue to spend and to outgrow their deficits, to outgrow their $37 trillion worth of debt. And where the long end of the bond market is, where bond yields are rising, that also reflects some concerns around the fiscal situation and potentially unsustainability of the scale of US government spending.

00:10:13:00 - 00:10:55:00
Jane Parry
Okay. Thank you very much. Thank you for your time today. As ever, I've learned a lot. Global equities have bucked the usual September back Back-To-School trend, which means they've gone up. And that's quite a broad picture across small mid and large caps, not just the usual magnificent seven. Arguably, US policy seems to be having an impact and achieving what the government is very is setting out to do, particularly around employment and inflation, which has allowed the fed to cut rates, albeit there's a lot of scepticism around that. And whether this will continue, so bit of a watching brief. So, lots to take away from the chat today. So thank you very much. 

00:10:55:00
Tom Hibbert
Thank you.

00:10:57:13 - 00:11:22:00
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.