Our weekly podcast

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.

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