Our weekly podcast

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

00:00:24:00 - 00:00:26:00
Leah Bramwell
Morning. Thank you for having me again, Jane.

00:00:26:00 - 00:01:36:00
Jane Parry
Lovely to see you. So, as you know, each week we try to cut through all the noise that's going on in the markets. This week, the noise we've just been talking about is local elections, but we're trying not to stray into that territory, demystifying what's going on in a simple and easy to understand manner. And hopefully then you can feel more informed, more confident and more in control of your financial future. So this week, Leah, I really wanted to talk to you about two of the market's traditional safe havens, which seem to be behaving very differently and not in the way we would normally expect. In the past few weeks, we've been talking about AI and the Magnificent 7 in the US driving markets. But I think it'd be more interesting for our listeners to hear a little bit more that's a bit less obvious maybe about what's happening. So grab your coffee, let's dive on in and let's see what's going on behind those headlines. So, as I mentioned, markets are still being driven by AI and tech, but we want to look beyond that this week to something more subtle and arguably more important is happening in the so-called safe parts of the market. So could you just briefly give us an intro as to what we're talking about here?

00:01:36:00 - 00:01:55:00
Leah Bramwell
Absolutely. So, I'm sure we'll come back to AI because it's driving lots of things at the moment. But I wanted this week really to touch upon a couple of other sectors and thematics that I think have some really interesting dynamics going on at the moment. So that would be infrastructure and precious metals and associated mining stocks.

00:01:55:00 - 00:02:01:00
Jane Parry
OK. So should we have a little look into infrastructure first? So what's the story there? What's happening?

00:02:01:00 - 00:02:20:00
Leah Bramwell
Absolutely. So infrastructure historically has been viewed as a fairly defensive sector. It's got a very high allocation to utilities. More defensive parts of the market, which are typically regulated, typically have significant elements of inflation linking within their cash flows.

00:02:20:00 - 00:02:22:00 
Jane Parry
So how does that work?    

00:02:22:00 - 00:03:16:00
Leah Bramwell
The underlying cash flows of the business would be linked to inflation. So if inflation is higher, the revenues of the business automatically go up because those cash flows are contractually linked often to governments with inflation. And so they often are viewed as a safe haven. In times of market stress, those types of assets tend to be more defensive than the wider market. And it's been a really interesting area over the last 18 months because it has evolved away from being a purely sort of defensive play, steady eddy, in times of stress to being linked to some of the spends that we're seeing in the AI build out. So the electrification of economies and the energy that's required to build out that AI capacity has been benefiting these traditionally more defensive names.

00:03:16:00 - 00:03:18:00
Jane Parry
So the AI story feeding into infrastructure.

00:03:18:00 - 00:03:34:00
Leah Bramwell
Exactly. And so you're having exposure to that theme without some of the froth and the hype of the technology names and certainly without the valuations associated with those names, but you're having exposure to that CapEx in a still -

00:03:34:00 - 00:03:36:00
Jane Parry
CapEx being capital expenditure.

00:03:36:00 - 00:03:38:00
Leah Bramwell
Exactly. 

00:03:38:00 - 00:03:43:00
Jane Parry
And what those AI tech companies are investing in to drive that AI growth?

00:03:43:00 - 00:03:50:00
Leah Bramwell
Exactly, the sort of the plumbing the nuts and the plumbing of, not the sexy bit, but the bit that is required in order to make it happen.

00:03:50:00 - 00:04:00:00
Jane Parry
OK. And so the other safe haven sector you mentioned is precious metals and mining. So what, gold, silver?

00:04:00:00 - 00:05:03:00
Leah Bramwell
Yeah. So mining not typically a safe haven, but gold in itself traditionally viewed as a safe haven asset. So where you have geopolitical instability, where you have very uncertain inflationary environment, gold historically has been attractive during those times and we've seen really interesting market dynamics in gold again over the last 18 months. So a huge rally in the price of gold and silver and other precious metals in 2025, and at the beginning of 2026. And we spoke I think last time as the US-Iran conflict was kicking off that one would have expected that precious metals would have behaved positively in that environment. But in fact, we saw inflation concerns in the markets leading to an adjustment in expectations for interest rates which hurt the price of gold rather than having an increase in the price of gold.

00:05:03:00 - 00:05:12:00
Jane Parry
OK, right. You might need to explain that to me. So, the reason why high inflation can impact the price of gold? Explain that a little bit more.

00:05:12:00 - 00:06:29:00
Leah Bramwell
So usually, inflation is viewed as positive for the gold price, inflation in itself because gold is a store of value. But where you have expectations for interest rates going up, that's negative for gold because if interest rates are higher, your opportunity cost of holding gold, i.e. what you would get if you were choosing something else, cash in a bank or a bond, you get a higher return from that than you do from gold. Gold doesn't pay any interest. You're not getting anything from holding gold. And so if your interest rate on cash goes up, you're more inclined to go for that because you're getting a better return relative to gold. So there's quite a lot to unpick. It's not exactly clear always what the drivers of the gold price are, but really a sort of stagflationary environment that is low growth, high inflation. Low growth, so central banks are not inclined to increase interest rates, but still high inflation is viewed as the ideal environment for gold. And arguably that's been where we have been or concerns over that's where we're going over the last year has impacted the price of gold over the last year.

00:06:29:00 - 00:06:42:00
Jane Parry
Interesting, interesting times. So what you're saying is one traditional safe haven is behaving exactly like you'd expect, which is infrastructure, whereas the other one isn't, which is gold.

00:06:42:00 - 00:07:56:00
Leah Bramwell
Yeah. So what I'm saying really is that one might expect both of these asset classes to behave in the same way in the environment that we're in. So one might expect in an environment where inflation is relatively higher and sticky and interest rates remain relatively contained, one might expect that to be a good environment for both infrastructure and for gold. And for 2025 that absolutely was the case. Infrastructure, utilities were one of the top performing sectors in 2025 and gold, obviously gold and gold mining equities as well, which tend to correlate, were exceptional in 2025. So that story played out. But year to date in 2026, they've sort of diverged. And I think that's really interesting because infrastructure is now very much being linked to that AI spend, that AI theme and gold having had such a huge run and perhaps some speculative activity in that market as well, has given back all of its gains from the beginning of the year and is now trading sort of roughly in line with where we started the year.

00:07:56:00 - 00:08:06:00
Jane Parry
Is there anything else beyond the sort of the AI CapEx that could be influencing the infrastructure situation?

00:08:06:00 - 00:08:21:00
Leah Bramwell
I think infrastructure probably has become more onto people's radar. Infrastructure was hit very, very hard as interest rates went up in 2022 because I think a lot of investors were using infrastructure as an alternative to fixed income.

00:08:21:00 - 00:08:23:00
Jane Parry
OK, how does that work then?

00:08:23:00 - 00:09:02:00
Leah Bramwell
Infrastructure pays a good yield. And so, when interest rates were basically zero before we saw this latest cycle of tightening, people were using infrastructure to provide yield within portfolios. And then when interest rates started going up, infrastructure was hit very hard by certain parts of the market. And so, I think the infrastructure which was really out of favour for quite a while, certainly a couple of years, it was really a difficult place to be. And I think now that that's started to turn around, there's a lot of positivity more in the sector than there was even this time last year.

00:09:02:00 - 00:09:11:00
Jane Parry
And I guess there are a lot of power grids, data centres and energy infrastructure required to run all that AI that we're starting to see coming through.
 
00:09:11:00 - 00:09:44:00
Leah Bramwell
Yes, exactly. And I mean there is infrastructure spend I think above and beyond that as well. You know, certainly in Europe, that some of the fiscal environment has improved. I think for infrastructure, I think certain governments are looking to spend in ways that they haven't been over the last 10-15 years in terms of sort of improving the infrastructure environment. So it's not just an AI story. I think that it goes beyond that, but I think it the prospects for the sector look good.

00:09:44:00 - 00:10:23:00
Jane Parry
Good, thank you. It's probably a good time to sum up what is in my Canaccord take away coffee cup today. I think we've said that not all safe havens are safe. So, investors should probably look at the fundamentals, not just the assumptions and the headlines to make sure that they're considering thematic differences underneath the surface sort of thing. And that this extends beyond the tech AI story. While traditional safe havens like gold perhaps are not behaving in the same way and demonstrates, as we say most weeks, the importance of active selection, close monitoring within portfolio.

00:10:23:00 - 00:10:36:00
Leah Bramwell
Exactly right. I think it's really important to recognise that there's lots of stories going on in the market and there's lots of complimentary stories and to be active and to be proactive in making sure that your portfolios reflect those things.

00:10:36:00 - 00:10:55:00
Jane Parry
Thank you and thank you very much for listening to the Canaccord Coffee Break podcast today. I hope you've enjoyed it. Don't forget to hit follow Spotify, Apple or your podcast channel of choice so you never miss an episode. And as always, we'd love to hear your thoughts. Do drop us an e-mail coffeebreak@canaccord.com. Thank you.

00:10:55:00 - 00:10:56:00
Leah Bramwell
Thanks, Jane.

00:10:56:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

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

00:00:24:00 - 00:00:25:00
Tom Hibbert
Hi everyone, good to be back.

00:00:25:00 - 00:01:23:00
Jane Parry
Welcome, welcome. And as you know, each week we try to cut through the noise and demystify what's going on in the markets in a simple and easy to understand manner so then you can feel more informed, more confident and more in control of your financial future. So this week, Tom, I want to have a little look back on April, because now we’re the beginning of May, and understand why markets surged really during April and why this actually matters for long term investors and what that all means. So, grab your coffee and let's dive on in. So, April was the strongest month for markets since late 2020, I think you said, with global equities up 10.15% to be precise in April. So what has changed after the wobbles we saw in March? And is this mainly about corporate earnings or is it something broader?

00:01:23:00 - 00:02:25:00
Tom Hibbert
Yeah. I mean, you'll note that in this podcast, we're not going to talk about the conflict in the Middle East. And I think that's actually one of the key components because markets have really started to look through that energy shock and all of the tensions there and focus much more on the fundamentals. And the fundamental picture has been incredibly solid. And that really shone bright in April as companies have reported earnings, particularly in the US. So it's the US where companies have reported so well and the US has led the charge for global equity markets. There’s also been broader earnings strength. So we've had about 50% of companies reports now in the US, we're on track for a sixth consecutive quarter of double-digit earnings growth. Analysts are still forecasting really solid earnings growth, so up to over 21% for the next 12 months, which is really quite remarkable strength.

00:02:25:00 - 00:02:28:00
Jane Parry
Yeah, that does sound impressive. So how unusual is that then?

00:02:28:00 - 00:03:15:00
Tom Hibbert
Yeah, it's quite unusual to have six consecutive quarters. I mean, double-digit is growth is really solid. To have six consecutive quarters of such strong growth is really quite remarkable. And it's not just that, I mean, you're seeing record profit margins. Companies are beating on all 5 of the magnificent 7 companies that reported last week beat on both earnings and revenues. So remarkable strength across the board. But with the sort of mega cap tech stocks as the brightest lights. We've seen broad based earnings, but the focus last week was on particularly some of the tech related mega cap stocks, sometimes called the magnificent 7.

00:03:15:00 - 00:03:21:00
Jane Parry
The Magnificent 7 OK, so who is in the Magnificent 7? What are those companies?

00:03:21:00 - 00:03:37:00
Tom Hibbert
They're well, so five of the seven reported last week, Alphabet would be one of the key ones, had really strong results. That's Google, parent company of Google, Meta, another one that that reported.

00:03:37:00 - 00:03:40:00
Jane Parry
What's that, Facebook, Instagram?

00:03:40:00 -00:03:52:00
Tom Hibbert
Exactly, yeah. So those were the two key sort of drivers within the Magnificent 7 last week. You've got NVIDIA in there, which didn't report last week, but that's obviously been one of the market darlings of the last couple of years.

00:03:52:00 - 00:04:08:00
Jane Parry
So is this still all about AI excitement then? We've talked about that on the podcast in the past. Or are investors sort of seeing through that excitement and becoming a bit more demanding about costs and profitability, hence the earnings coming through?

00:04:08:00 - 00:04:57:00
Tom Hibbert
Yeah, and we've seen quite a lot of dispersion start to arise within the tech sector. This cycle is still really all about tech and driven by tech and within that particularly about AI and the revolution of the tech sector and the broader global economy driven by artificial intelligence. But we are now seeing greater focus within those tech darlings on the amount of capital expenditure, how much that capital expenditure is leading through to AI demand, demand for these large language models. How much business is it generating relative to the amount of expenses and investments that these companies are making at the same time. So, a more scrupulous approach to how markets are reacting to these results.

00:04:57:00 - 00:05:20:00
Jane Parry
OK. Thank you. So, let's talk about central banks. And last week, there were a total of 10 central bank meetings, including the Fed in the US, the European Central Bank, the Bank of England and the Bank of Japan. So, 10 central bank meetings all in one week sounds busy and dramatic. And I know you love a central bank meeting.

00:05:20:00 -00:05:22:00
Tom Hibbert
I do.
 
00:05:22:00 - 00:05:25:00
Jane Parry
The markets barely reacted. So why was it so quiet?

00:05:25:00 - 00:05:59:00
Tom Hibbert
Yeah, this half of the podcast risks being a little bit boring, because there's there weren't really any surprises. But, you know, all of these central banks fundamentally face renewed inflation challenges. The key question is how much inflation is coming down the pipeline from this energy shock and how will central banks respond to that? Now, the UK, Europe, Asian central banks, you know, the Bank of Japan, they, they're all more sensitive. Those economies are more sensitive to this energy shock than the US, so the US has a bit more flexibility.

00:05:59:00 - 00:06:03:00
Jane Parry
Because the US has got its own energy supply.

00:06:03:00 - 00:06:05:00
Tom Hibbert
Exactly. Yeah.

00:06:05:00 - 00:06:07:00
Jane Parry
It can pump its own oil. 

00:06:07:00 - 00:06:46:00
Tom Hibbert
It's a little more insulated from the shock. The market still expects the Federal Reserve at the margins to cut rates, whereas the market's expecting interest rate hikes, particularly in Europe from the European Central Bank and the UK. The question is the UK and Eurozone have weaker economies. Those economies are slowing and the transmission effect then from this energy shock is more difficult, it's less clear for it to transition from a supply side shock into the demand side into wage growth and companies might struggle more to pass on rising prices to consumers. So with that less clear, maybe those central banks will still be more hesitant to hike interest rates, but that's what the market is expecting. And you know, both of those central banks, they spoke about their flexibility to potentially raising interest rates, if there are signs of inflation transmitting away from just the energy shock into more core inflation, into goods prices and wages. And I think that is still a key concern that central banks are going to be watching very carefully, but no surprises there.

00:07:23:00 - 00:07:26:00
Jane Parry
Hence not masses of market reaction.

00:07:26:00 - 00:08:10:00
Tom Hibbert
Not masses of market reaction. The biggest surprise was in the US, actually, which is more insulated from the shock. The Federal Reserve where, you know, this was the last meeting with Jerome Powell as the chair. And it was also the one meeting during his chairmanship which saw the most dissent in terms of , not actually in terms of voting against the decision to hold rates, but they left in the statements that they released with the decision, a sentence that still showed an easing bias that they were more inclined to cut interest rates than raise interest rates. And there were three members of the committee that opposed the inclusion of that statement, which is quite unusual.

00:08:10:00 - 00:08:14:00
Jane Parry
And the implication of that for rates and for investors is what?

00:08:14:00 - 00:08:33:00
Tom Hibbert
It was seen as more hawkish, which means that the Federal Reserve, actually the market, sees them as still cutting rates. Maybe they are more inclined to hike interest rates. So that was a little bit of a hawkish surprise at the meeting, and it's a bit of a sour note for Powell to end his chairmanship on.

00:08:33:00 - 00:08:34:00
Jane Parry
But he's going to still stay on the board, isn't he?

00:08:34:00 - 00:08:54:00
Tom Hibbert
Yeah, good point. He is. He's staying on the Board of Governors for an unspecified period. And he cited the political interference worries that the Federal Reserve is under too much pressure from the US administration to cut interest rates. So, he's decided to stay on, citing that political interference as his reason.

00:08:54:00 - 00:09:02:00
Jane Parry
And what do you think? Do you think political pressure on central banks could become a bigger market issue over the next few years?

00:09:02:00 - 00:09:09:00
Tom Hibbert
The market has made it quite a big issue. I'm not as concerned as the market about it. I really like Kevin Warsh as a replacement.

00:09:09:00 - 00:09:11:00
Jane Parry
He's the new incoming Chairman of the Fed.

00:09:11:00 - 00:09:31:00
Tom Hibbert
Exactly. I really do rate him. I agree with a lot of his views on Fed policy in recent years. I think he's a very good replacement. I don't see any evidence that he will, you know, act as a puppet of the administration. He might have some views that share a lot of the views of the administration.

00:09:31:00 - 00:09:33:00
Jane Parry
But that's a different thing.

00:09:33:00 - 00:09:49:00
Tom Hibbert
That's, you know, that’s not an issue by itself, you know, and the Fed will still remain a committee with committee led decisions. I think injecting a little difference of opinion is actually probably a healthy thing into the Federal Reserve. So I think it's a bit of a red herring, the whole political interference thing.

00:09:49:00 - 00:10:00:00
Jane Parry
So, if you had to boil all of this down, just thinking about our clients and long-term investors and what should they be focusing on the most? Is it earnings? Is it rates? Is it geopolitics?

00:10:00:00 - 00:10:03:00
Tom Hibbert
Yeah, everything altogether really is important.

00:10:03:00 - 00:10:05:00
Jane Parry
Sit on that fence.

00:10:05:00 - 00:10:41:00
Tom Hibbert
Yeah, sit on the fence. I'll try and be more opinionated. Look, I think earnings have been a real highlight and it just shows how the strength of the corporate landscape that's underlies the investment environment that we're in at the moment. Yes, there's a lot that you can get worried about. But fundamentally, when you look through all of that fog, there's a really solid backdrop. The question for me, the key question, is to what extent is that fundamental strength reflected in valuations And you know markets are quite expensive, so you're paying up for that quality.

00:10:41:00 - 00:11:09:00
Jane Parry
Yeah. All right. Understood. OK. Well, I think it's probably time for me to sum up what is in my Canaccord take away coffee cup this week. So, April's rally was driven by the fundamentals. We just talked about earnings led and not just by excitement, not people just getting carried away with the markets. US earnings growth in particular is very strong. We talked about AI investment, particularly with the headline tech names, the Magnificent 7, but probably broadening out a little bit as well.

00:11:09:00 - 00:11:19:00
Tom Hibbert
Yeah, well, the focus is shifting. It's becoming more scrupulous in terms of investors really need to start seeing the returns on that investment.

00:11:19:00 - 00:11:40:00
Jane Parry
And while inflation is still a concern, the central banks have been talking about that they are treading carefully as growth outside the US cools. So just keeping an eye on that one. So for long term investors, I think it's the same message as we say most weeks, stay anchored in earnings really and quality, keep diversified and perhaps don't let all the short-term noise distract from some of the long-term opportunity that we're seeing.

00:11:40:00 - 00:11:42:00
Tom Hibbert
Precisely that.

00:11:42:00 - 00:12:02:00
Jane Parry
So thank you so much for listening to the Canaccord Coffee Break podcast. We do appreciate it. If you've enjoyed it, don't forget to hit follow on Spotify or Apple or your podcast channel of choice. And then you will never miss an episode. And as always, we'd love to hear your thoughts. Drop us a line. Ask us questions. Coffeebreak@canaccord.com.

00:12:02:00 - 00:12:09:00
Tom Hibbert
And you have a break from me next week. Then you've got the excellent Leah Bramwell back on the podcast. So everyone will be glad to hear that.

00:12:09:00 - 00:12:10:00
Jane Parry
Thank you very much.

00:12:10:00 - 00:12:11:00
Tom Hibbert
Thank you.

00:12:11:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal entity. It is accurate at the time of recording and is subject to change.

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

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

00:00:23:00 - 00:01:43:00
Jane Parry
Morning, morning. And as you know, Tom is here to help me cut through the noise, demystify what's going on in the markets, hopefully in a simple and easy to understand manner, and then you can feel more informed, confident and more in control of your financial future. So this week, Tom, we are focusing on oil because right now, it seems it's the market's most direct pressure point. And the big question I'd like you to help us answer today, please, is why hasn't a $100 oil price triggered the kind of panic we've seen in the past? And really, what should investors actually do about it? So grab your coffee, you've got your coffee, and let's dive on in. So, as I say, mainly talking about oil and oil prices this week, this seems to be the most immediate transmission channel, they say, from the Middle East conflict into the market. And prices have moved from about $60.00 a barrel to about $100 a barrel. And I think we would say they are surging rather than spiralling out of control. And I saw that some commentators have noted that the move still looks contained relative to the scale of the disruption and also compared with historical shocks.

00:01:43:00 - 00:01:45:00
Tom Hibbert
Exactly.

00:01:45:00 - 00:02:00:00
Jane Parry
And I know that you put in this week's weekly markets review that the 1973 Arab oil embargo removed roughly 5% of global supply but drove a 400% price surge. So this is very different from that situation.

00:02:00:00 - 00:02:33:00
Tom Hibbert
Yeah, it's a bigger share of global supply that goes through the Strait of Hormuz. It's 20%, it's a fifth of global supply that goes through the Strait of Hormuz. So it's a much bigger shock but a much smaller price shift that we've seen. And you know, there's a few interesting reasons for that. The first is that, you know, supply has been disrupted, but it hasn't been, it hasn't completely disappeared. It's been of quite an adaptive market.

00:02:33:00 - 00:02:34:00
Jane Parry
An adaptive market? What does that mean?

00:02:34:00 - 00:03:08:00
Tom Hibbert
In that, you know, Saudi Arabia, the UAE, they've found alternative ways to sort of reroute what would have previously gone through the Straits of Hormuz. So they've pushed alternative pipeline infrastructure to capacity, effectively, and that's diverted flows away from the Strait. So what they've managed to replace is about seven million barrels per day, which is about 35% of the supply shock.

00:03:08:00 - 00:03:10:00
Jane Parry
That previously went through the strait?

00:03:10:00 - 00:03:42:00
Tom Hibbert
Exactly. So the seven million barrels a day compares to about 20 million that was going through the straight on a daily basis. Second, that we've seen, you know, a lot of emergency supply from strategic reserves. We've seen strategic reserves being released into the market, which has helped dampen the supply shock. And also there's been this policy flexibility from, particularly from the US, to accommodate sanctioned barrels from, you know, from other countries. Sanctions on Russia have been softened, for instance.

00:03:42:00 - 00:03:46:00
Jane Parry
So that they can then sell their oil globally.

00:03:46:00 - 00:03:49:00
Tom Hibbert
Yeah. And that's injected additional liquidity into the market.

00:03:49:00 - 00:03:50:00
Jane Parry
No pun intended.

00:03:50:00 - 00:03:59:00
Tom Hibbert
No pun intended. And then you've got this - there's the global price for oil, which people tend to look at the nearest sort of futures contract.

00:03:59:00 - 00:04:03:00
Jane Parry
Hang on a minute. Hang on a minute. The near the what?    

00:04:03:00 - 00:04:50:00
Tom Hibbert
Yeah, the nearest term futures contracts. So the point is it's not the physical market, it's not the spot market today. It’s not like you go into a shop and buy oil. If you try and do that, you buy oil today in some sort of specific location, it might be much more difficult than the price that you see on your Bloomberg Terminal, $100 a barrel. And we've seen that. So physical markets, particularly in Asia, have been a lot tighter. You've seen prices up to $260 a barrel, buyers paying substantial premiums to secure this very sort of limited supply. And I think that's the key. So global benchmarks and the futures that people look at understate the severity of local disruptions in the spot market.

00:04:50:00 - 00:04:52:00
Jane Parry
OK, I think I get all that.

00:04:52:00 - 00:05:20:00
Tom Hibbert
And then finally you've got this saying that the cure for high oil prices is high oil prices, in that when you have high oil prices, it constrains demand. And if you've got lower demand for oil on the back of that or high oil prices, for example, might trigger a growth shock, you have lower oil prices on the back of that. And we've already seen the International Energy Agency lower their expected global oil demand for this year.

00:05:20:00 - 00:05:27:00
Jane Parry
OK. So things that they're talking about, fewer air flights, less air travel, that sort of thing.

00:05:27:00 - 00:05:30:00
Tom Hibbert
Yeah, those are a few good examples.

00:05:30:00 - 00:05:45:00
Jane Parry
So what about the other thing I was hearing? So there's a supply and demand, but also that there's simply less energy intensity than in previous decades, therefore not quite the same shock as there would have been in the 1970s. Does that make sense?

00:05:45:00 - 00:06:34:00
Tom Hibbert
Yes. And in fact, I think that's the most important, important point. So people are saying now that maybe 150, maybe $200 for oil is the new 100, the price that it takes really to trigger a global economic slowdown, which is why we haven't seen the panic across markets. We've got an elevated oil price, but because the global economy is less energy intensive than in previous decades, we've got a more diverse source of energy supply with less oil reliance that actually it takes a much higher oil price to trigger the same sort of slowdown as we may have seen in the 70s.

00:06:34:00 - 00:06:42:00
Jane Parry
So what would make you sort of genuinely more concerned from here? What indicators are you watching most closely?

00:06:42:00 - 00:06:49:00
Tom Hibbert
Sure. I think the key thing has to be inflation and we're already seeing inflation pick up on the back of this.

00:06:49:00 - 00:06:51:00
Jane Parry
So the energy shock is feeding through into inflation.

00:06:51:00 - 00:07:07:00
Tom Hibbert
Into inflation, but it's feeding through purely in energy prices. I mean energy prices direct into inflation. So that's where the concentration is. The real worry is if you see that broaden out into other areas, so into the demand side in particular.

00:07:07:00 - 00:07:13:00
Jane Parry
OK. We’ve talked about the supply side and demand side on the podcast in the in the past.

00:07:13:00 - 00:08:05:00
Tom Hibbert
Right, exactly. So, you know, if we start seeing wage growth really pick up or if businesses who have, obviously energy is a key input into business costs, will businesses put their prices up for their products? And you know, that is a concern. There's less of, they'll find that more difficult because the economy was already slowing. Demand was already, you know, quite constrained. Consumer spending was, you know, reasonable, but wasn't as sort of hot as it was in previous periods of inflation in recent in recent times. So there's less of an obvious transmission for that to happen. But that's something that we're looking at and we're already seeing inflation, inflation in the UK rose to 3.3% last week, up from 3%. But as I say, all of that so far is attributable to energy prices.

00:08:05:00 - 00:08:13:00
Jane Parry
So core inflation relatively contained at the moment and longer-term inflation expectations still fairly anchored.

00:08:13:00 - 00:08:35:00
Tom Hibbert
Yeah. That's and that's the other key point actually. So the general view is that this is a sort of transitory energy shock because the demand side of the economy is still quite weak and slowing. So if you look at the market expectations for inflation, the market still sees inflation undershooting the Bank of England's 2% target over the medium term.

00:08:35:00 - 00:08:39:00
Jane Parry
So, talking about the Bank of England then, what does this mean for central banks and interest rates? Any impact?

00:08:39:00 - 00:09:08:00
Tom Hibbert
Yeah, there obviously are, because previously central banks wanted to cut interest rates and were sort of progressing with their easing cycles. This has thrown a major spanner in the works for most central banks and they're now going to find it much more difficult to cut interest rates in the face of an obvious inflation, inflationary impulse. So, we've got a whole host of central bank meetings next week.

00:09:08:00 - 00:09:10:00
Jane Parry
Oh, you'll love that. You love the Central Bank meetings don’t you.

00:09:10:00 - 00:10:43:00
Tom Hibbert
I do. We've got the Bank of England, we've got the Feds, we've got the ECB, we've got the Bank of Japan. I think we've got 10 in in total, Bank of Canada. So it's all happening and the general pattern that we're seeing is that central banks are now just on hold. So rate cuts have been delayed. But I think the bar for renewed tightening, that means what it'll take them to start raising interest rates again, is still very high, given the fact that this still looks very much like a supply side shock. And I think as long as expectations, inflation expectations, we're watching those medium-term inflation expectations, as long as they stay anchored and those second-round effects are contained, this is more likely to slow the pace of easing rather than reverse it back to interest rate hikes. And then the last thing I'll say is obviously there's a lot of uncertainty around the ongoing, this ceasefire at the moment, that it's very fragile. You know, we could say Schrodinger is strait of Hormuz because no one knows whether it's open or closed. It's simultaneously open and closed, supposedly, but as long as a resolution to the conflicts and everything that's happening in the Middle East is elusive, bond yields will still stay elevated. And we're seeing that in the UK and Europe in particular, which are most sensitive to this energy crisis. And also, as long as the conflict, you know, continues, the probability for more structurally embedded inflation, is increased. So those are the key concerns.

00:10:43:00 - 00:11:22:00
Jane Parry
Thank you. Well, thank you very much for your time today. Let me sum up what is in my Canaccord take away coffee cup today. So we talked about oil prices being higher, but not necessarily disorderly. The markets are more adaptive, you said, than in past crises. That means they can adapt more because they can get supply from elsewhere, turn on a few more taps. Inflation impacts are being closely watched but remain contained. Central banks are cautious but not panicking. And you're looking forward to next week's meetings. And overall, I think what we're saying is perspective matters really more than the headlines at the moment.

00:11:22:00 - 00:11:34:00
Tom Hibbert
I think the key message is it's reassuring how adaptive the market has been and how robust the economy has been on the back of elevated and not spiralling oil prices.

00:11:34:00 - 00:11:44:00
Jane Parry
So as ever, I think this week is another good reminder that portfolios need to be built for resilience, diversity, just to accommodate these sorts of things going on in the world.

00:11:44:00 - 00:11:45:00
Tom Hibbert
Absolutely.

00:11:45:00 - 00:12:02:00
Jane Parry
So thank you again for listening to the Canaccord Coffee Break Podcast. If you've enjoyed it, don't forget to hit follow on Spotify or Apple or your podcast channel of choice so you never miss an episode. And as always, we'd love to hear your thoughts. Drop us an e-mail coffeebreak@canaccord.com. Thank you.

00:12:02:00 - 00:12:04:00
Tom Hibbert
Thank you. Thank you, Jane.

00:12:04:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal 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 I'm again delighted to be joined by Tom Hibbert from our Chief Investment Office.

00:00:23:00 - 00:00:24:00
Tom Hibbert
Hello everyone.

00:00:24:00 - 00:00:46:00
Jane Parry
Tom, as you know, is our Chief investment Strategist and here to help me demystify what's going on in the markets, hopefully in a simple and easy to understand manner, so that you can feel more informed, more confident and more in control of your financial future. So, this week feels really important because we've seen markets swing from panic to confidence in just two weeks.

00:00:46:00 - 00:00:47:00
Tom Hibbert
Absolutely.

00:00:47:00 - 00:00:49:00
Jane Parry
So really unusual.

00:00:49:00 - 00:00:56:00
Tom Hibbert
A remarkable recovery in equity markets. Very strong performance in bond markets. Sharp fall in oil prices.

00:00:56:00 - 00:01:06:00
Jane Parry
So we'll get into that in a minute. And also, investors are sending a very clear signal here in the UK about the UK government gilts bonds.

00:01:06:00 - 00:01:19:00
Tom Hibbert
Absolutely. Very successful gilt syndication or sale from the UK Treasury last week, which is a sign of confidence I suppose, or there's a lot of demand for gilts at these high yields.

00:01:19:00 - 00:01:43:00
Jane Parry
So let's get into that as well. So grab your coffee and let's dive on in. So, as we just said, we have had a very strong start to earning season, which has helped push equities back to record highs. But it's the speed of that recovery that's been really interesting in the last week or so. So can you just quickly summarise for us what's happening in the markets and why this is unusual?

00:01:43:00 - 00:01:49:00
Tom Hibbert
Sure. Global equities gained almost 4% in dollar terms last week.

00:01:49:00 - 00:01:52:00
Jane Parry
And it was what, 4.1 the week before?

00:01:52:00 - 00:02:04:00
Tom Hibbert
Yeah, exactly. And the tech sector, once again, the best performing sector that was up 7.7% last week. But the most striking thing, as you say, was the speed of the recovery.

00:02:04:00 - 00:02:08:00
Jane Parry
So why? Why does that matter to investors, I guess?

00:02:08:00 - 00:03:01:00
Tom Hibbert
Well, it's just happened so sharply that you know, you blink and you missed it. It's been a little over a fortnight and markets were already back at record highs. It's almost like there's nothing to see here. The market is pricing in no conflict, no conflict at all, which is quite interesting. The US last week, the US market gained more than 3% for the third consecutive week in a row. I think that's the first time in in decades that that that we've seen that. So a really remarkable strong recovery. Market leadership has been very rotational. So we've spoken a lot on this podcast before. The stocks that have led the charge, that led the recovery have been the weakest when the pendulum has swung the other way and that is still the case. We see it still seeing a very rotational market.

00:03:01:00 - 00:03:01:00
Jane Parry
So when you say rotational, highly rotational, is that basically investors moving money quickly between yesterday's losers and today's winners rather than backing one big theme?

00:03:11:00 - 00:03:13:00
Tom Hibbert
Yes.

00:03:13:00 - 00:03:15:00
Jane Parry
Perhaps give us some examples?

00:03:15:00 - 00:03:57:00
Tom Hibbert
Yeah, sure. Well, we've said that markets have been passengers to news flow and that's the best example. You have events over the weekend where you know, you have the Iranian gunboats firing on a tanker going through the Straits of Hormuz when there's supposed to be a ceasefire. And you know, the day before, the foreign minister was saying that the straight was open. And then this morning you have equities on the back of that quite weak and there's a lot of developments and the market is reacting quite aggressively to those developments. It's an opaque market and you've got big swings depending on developments in the Middle East.

00:03:57:00 - 00:04:06:00
Jane Parry
OK. So difficult to predict what's going to happen next, I guess. So what has led to the rally then, given that we've still got this geopolitical uncertainty and tension?

00:04:06:00 - 00:04:21:00
Tom Hibbert
Yeah, undoubtedly that's been the most prominent driver. The easing of it, I think the market has very aggressively rallied on the back of a very fragile ceasefire. So it's been –

00:04:21:00 - 00:04:23:00
Jane Parry
Heavily optimistic.

00:04:23:00 - 00:04:50:00
Tom Hibbert
Potentially, potentially there's a little bit of a disconnect there. But then you've also had, if you look through that geopolitical tension, you then have a resilient economy and we've had earnings season get underway last week and we've seen some really solid results. We've seen some solid results from the banks and that has also helped equity markets maintain the strong momentum over the last fortnight.

00:04:50:00 - 00:05:07:00
Jane Parry
OK, so while equity investors are feeling braver, bond investors in the UK are loudly voting with their feet. It's been reported there has been a record demand for this 10-year gilt syndication, which as I understand it, is essentially a big one off borrowing by the UK government.

00:05:07:00 - 00:05:20:00
Tom Hibbert
Yep, the Debt Management Office has issued a large, about £15 billion worth of gilts, and there's been a huge amount of demand, record demand.

00:05:20:00 - 00:05:22:00
Jane Parry
Yeah, 10 times oversubscribed.

00:05:22:00 - 00:05:23:00
Tom Hibbert
Yeah. Exactly.

00:05:23:00 - 00:05:28:00
Jane Parry
So who are these subscribers? You know who is buying the UK debt?

00:05:28:00 - 00:05:51:00
Tom Hibbert
All sorts of people, I mean a lot of institutional investors are buying gilts and taking a positive view on the UK government bond market at these current elevated yield levels, which aligns very closely with our view, that you have all sorts of people from hedge funds to, you know, global hedge funds to UK pension funds, all sorts.

00:05:51:00 - 00:05:56:00
Jane Parry
So it’s mainly institutional investors rather than individuals, is it?

00:05:56:00 - 00:05:57:00
Tom Hibbert
Yes, yeah.

00:05:57:00 - 00:06:02:00
Jane Parry
OK. And so why are they so keen to lend money to the UK government then? Just because they're getting a great return?

00:06:02:00 - 00:07:37:00
Tom Hibbert
Yeah, I suppose the market reaction to this crisis has been very pessimistic and now it seems that actually the market has reversed that view in a way that, at these current elevated yields, there's a huge amount of demand. So it's a real vote of confidence last week in the elevated yields available for gilts and you say just institutional investors, but also, you know, there are great benefits for individuals. So, although it's institutions that make up the bulk of the buying, gilts are attracting all sorts of buyers including sort of private clients and wealth demand as well. So a very compelling opportunity, I think, in UK gilts at the moment. If you look at the two to seven-year part of the curve, sort of shorter dated part of the curve, you're now getting up to a sort of 4.4% yield on gilts. That's about 0.5% higher than at the end of February, a very attractive yield in the context of a slowing UK economy. And yes, there's inflation uncertainty, but most models and forecasts still see inflation falling, particularly next year. So economists generally see inflation at about 2 1/2% next year. There's obviously a lot of uncertainty in the short term given what's happening in in the Middle East. But over the long term, people still see inflation relatively moderate and higher yields or attractive elevated yields are quite compelling in the UK at the moment.

00:07:37:00 - 00:07:53:00
Jane Parry
So, in my simple understanding, then if you're getting 4, 4.5% yield on a gilt and assuming inflation stays at the rates being forecast, then you're locking in, effectively locking in a real return over the –

00:07:53:00 - 00:08:03:00
Tom Hibbert
I don't want to say locking in because obviously inflation is an uncertainty. So if inflation ends up being a lot higher, you end up getting a negative real return.

00:08:03:00 - 00:08:05:00
Jane Parry
But where you are today looking forward?

00:08:05:00 - 00:08:12:00
Tom Hibbert
That bet looks attractive given the general outlook for inflation.

00:08:12:00 - 00:08:44:00
Jane Parry
OK, understood. Thank you. Thank you for explaining all that to me. It's probably a good time for me to sum up what is in my Canaccord take away coffee cup this week. So global equities have rebounded remarkably fast off the back of three key drivers #1 resilient economic data globally #2 robust earnings, which we're starting to see come through now in the earnings season, and #3 probably most prominently, the easing of geopolitical tensions, although we would feel that that last point remains a little fragile.

00:08:44:00 - 00:08:47:00
Tom Hibbert
A little bit.

00:08:47:00 - 00:08:57:00
Jane Parry
And again, gilts are back in my coffee cup, offering compelling yields, underscored by record demand for UK’s latest 10-year issue. Interesting times.

00:08:57:00 - 00:09:13:00
Tom Hibbert
And I supposed to look out for this week, we've got some more UK inflation numbers. So we'll talk about that on the podcast next week. And you know, still early days for earnings season. We so far have really good results coming through. But we'll give you an update on how that's progressing as well.

00:09:13:00 - 00:09:33:00
Jane Parry
Thank you. Well, thank you very much. I do hope you enjoyed the Coffee Break podcast today. Don't forget to hit follow so that you never miss an episode on your podcast channel of choice, whether it's Spotify, Apple, or another one, and share your thoughts with us, ask us questions, drop us a line coffeebreak@canaccord.com. Many thanks indeed.

00:09:33:00 - 00:09:34:00
Tom Hibbert
Thank you very much.

00:09:34:00
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 - 00:00:23:00
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 again to be joined by Tom Hibbert from our Chief Investment Office.

00:00:23:00 - 00:00:25:00
Tom Hibbert
Hello everyone.

00:00:25:00 - 00:00:41:00
Jane Parry
Tom is our Chief Investment Strategist and he is here to help me cut through all the noise of what's going on in the markets, hopefully demystify it in a simple and easy to understand manner and then you can feel more informed, more confident and more in control of your financial future.

00:00:41:00 - 00:00:43:00
Tom Hibbert
Another interesting week.

00:00:43:00 - 00:01:08:00
Jane Parry
An extraordinary week. Geopolitics and the markets all having fun again. Welcome, welcome and grab your coffee. Let's dive on in. So, this time last week, Tom, we were talking about Trump's ultimatum, which was followed by the announcement of a very fragile two-week ceasefire between the US and Iran. Since then, global equities have gained 4.1%

00:01:08:00 - 00:01:09:00
Tom Hibbert
In dollar terms

00:01:09:00 - 00:01:14:00
Jane Parry
Yep. So just give us a brief summary of what's happening in the markets off the back of that.

00:01:14:00 - 00:02:19:00
Tom Hibbert
Sure. I think the ceasefire took everyone by surprise really and we saw a very strong reaction across financial markets everywhere you looked. So, US equities led the rally. So global equities up 4%, 4.1% in dollar terms. US equities led, technology outperformed, all of the areas most sensitive or weakest since the conflict began, performed best. We saw this similar in credit markets. Credit spreads tightened, which means they outperformed, tightened forcefully almost back to where they were before the conflict began. So quite remarkable performance within credit markets. Government bonds as well. UK gilts, which we've spoken a lot about, performed very, very well. On the flip side, energy, which has been performing well when we've had higher oil prices on the back of the conflict, obviously fell back last week. So energy was the only sector within the global equity market to post negative returns and the oil price softened as well. So it fell back below $100 a barrel.

00:02:19:00 - 00:02:33:00
Jane Parry
OK. So markets seem to be taking some comfort from the ceasefire, at least for now, even if perhaps the underlying risks haven't completely disappeared. Not at all. So just let me pick up on oil.
 
00:02:33:00 - 00:02:54:00
Tom Hibbert
Just to say, so the underlying risks, they've obviously not disappeared at all, but the chance of more de-escalation after an initial ceasefire has been announced is obviously more likely. So the path to de-escalation I think is clearer than it was last time we spoke. So a lot of positives that I think justify the strong performance, but.

00:02:54:00 - 00:02:58:00
Jane Parry
I think that's fair, yeah. And we and we like to be positive on the podcast, don't we 

00:02:58:00 - 00:03:00:00
Tom Hibbert
Exactly, exactly. Let's pick up on oil.

00:03:00:00 - 00:03:13:00
Jane Parry
So let's go back to oil then. So we've been talking about the rising oil price for a few weeks now and the risk of supply side inflation. You just mentioned that oil prices fell back a bit last week.

00:03:13:00 - 00:03:37:00
Tom Hibbert
Not back to where they were. And already again, they're now back above $100 - But before the conflict began, they were in the high 50s, low 60s. They're still considerably high. There's a big premium on the oil market. And this is still a major supply side shock. And in fact, the energy that flows through the Straits of Hormuz is still completely paralysed despite the ceasefire.

00:03:37:00 - 00:03:43:00
Jane Parry
Yeah. So is this why the markets are starting to talk about the of stagflation?

00:03:43:00 - 00:03:47:00
Tom Hibbert
Yes. So stagflation is high inflation and low growth.

00:03:47:00 - 00:03:49:00
Jane Parry
High inflation and low growth. OK.

00:03:49:00 - 00:04:15:00
Tom Hibbert
And when you have high energy prices, it's basically a tax on growth, and it's obviously inflationary. So when you have an energy shock like this, it is a vast stagflationary impulse across the global economy. And and before the conflict begun, economies were already slowing, economic growth was already slowing. It looked like inflation was falling. Now you've got this big supply side energy shock, the risk of stagflation has suddenly increased dramatically.

00:04:15:00 - 00:04:21:00
Jane Parry
So as if the foot's been put on the brake.

00:04:21:00 - 00:04:23:00
Tom Hibbert
The brake in terms of economic output, economic activity and the accelerator in terms of inflation.

00:04:23:00 - 00:04:30:00
Jane Parry
But I was just thinking about the cost of filling up your car with fuel at the moment, it's gone up hugely hasn’t it?

00:04:30:00 - 00:04:57:00
Tom Hibbert
It has. We saw that in the US last week as well, actually, where US inflation jumped to 3.3%, big increase, entirely driven by gasoline prices. The risk though, is if inflation, the second order effects of high energy prices, if we see inflation broaden out across the rest of the economy, which can happen, there's less of a transmission, which we've spoken about on this podcast in recent episodes. But certainly that's a risk that everyone's concerned about.

00:04:57:00 - 00:05:03:00
Jane Parry
So why is stagflation then such a sort of loaded word for investors, for our clients?

00:05:03:00 - 00:05:27:00
Tom Hibbert
The consequences for financial market returns can be significant because if you have low growth, like a recession, markets tend to perform poorly and then you add on inflation as well. Most people want to beat inflation because that is the cost of how, you know the cost of living. But if you're losing money from this growth shock and you have high inflation, your real returns aren't just negative, they can be deeply negative.

00:05:27:00 - 00:05:28:00
Jane Parry
So it's like a double whammy.

00:05:28:00 - 00:05:30:00
Tom Hibbert
So it's a double whammy.

00:05:30:00 - 00:05:46:00
Jane Parry
OK. So as investors, we really don't like that word. Just thinking about portfolios then and how we're managing through this for our clients, which assets tend to struggle most in a stagflationary environment and perhaps which are a bit more resilient?

00:05:46:00 - 00:07:44:00
Tom Hibbert
As a multi asset investor, we tend to combine global equities and global bonds for natural diversification. That doesn't really work when you're in a stagflationary environment. That means that we want to build portfolios. There are still parts of the markets that can protect you during these, these sorts of environments, things like very short-dated parts of corporate bond markets. If you have short-dated debt, alternative areas of credit, asset backed securities is an area that we particularly like, you're not exposed to interest rate risk if central banks raise interest rates. If you buy higher quality asset backed securities, then you're less exposed to a growth shock as well. So they can perform very well in a stagflationary environment and commodities can perform well. You know, Oxford University did a study that showed that during inflationary regimes, when inflation is high or rising, no commodity works all the time. You should own a broad basket of commodities. Right now, it's all about energy as we've spoken. But in other inflationary regimes, you know, it's gold that works best. So we like commodities, broad commodities, but at the moment it's obviously all about energy. When you have a geopolitical shock and an energy shock. From a long-term portfolio construction perspective, I think active management is absolutely key because when the risks are tilted to the demand side, like a recession, you want to lower your risk and you want more government bonds. When risks are tilted to inflation, to the supply side, you want to be a little bit more tilted towards alternatives, things like commodities, short-dated credits, asset backed securities, the things I've mentioned. Inflation linked bonds can be good, an interesting place. You need to be able to understand them. They can be complex, but they're performing pretty well at the moment. So there are areas to hide, but being active from a top-down perspective is absolutely key. And that I think actually embodies our philosophy at Canaccord.

00:07:44:00 - 00:07:48:00
Jane Parry
Yeah, I was going to say it goes without saying that we are active wealth managers for our clients, aren't we?

00:07:48:00 - 00:07:55:00
Tom Hibbert
Yeah. And we really understand a lot of these markets, inflation linked bonds, asset backed securities are key parts of our

00:07:55:00 - 00:07:55:00
Jane Parry
Some of them are quite specialist I think.

00:07:57:00 - 00:07:58:00
Tom Hibbert
They are.

00:07:58:00 - 00:08:05:00
Jane Parry
Yeah. Is there anything else we need to know just thinking about long term portfolio construction or just about people thinking ahead?

00:08:05:00 - 00:08:50:00
Tom Hibbert
No, I mean I would say that we have this period of weakness, but it is set within a very strong period for markets. We spoke about it last week, when you look through this fog, and you note the uncertainty and you look at what you can see, the fundamentals, and the fundamental backdrop is still pretty positive. We're coming into earnings season now. There's a lot of optimism and I think we should see some pretty strong results. We're off the back of four quarters of US companies delivering double digit earnings growth. That's a positive even from a fiscal policy perspective. We're still in quite a stimulative environment. So there are some reasons, a number of reasons to stay positive, and I think the investment case is still pretty strong.

00:08:50:00 - 00:09:19:00
Jane Parry
Good. Brilliant. Thank you very much. So probably time for me to have a quick look what is in my Canaccord take away coffee cup today. So we're clearly not at the end of the conflict or the end of the uncertainty around the Strait of Hormuz, but we are a bit more hopeful that we can see an end in sight, energy and geopolitical backdrop remain a key risk even when prices lower or prices temporarily fall.

00:09:19:00 - 00:09:25:00
Tom Hibbert
And the situation's shifting quickly right now, it's still evolving.

00:09:25:00 - 00:09:28:00
Jane Parry
Yeah, that's why it's important. Resilience, diversification –

00:09:28:00 - 00:09:30:00
Tom Hibbert
And looking through the fog.

00:09:30:00 - 00:09:34:00
Jane Parry
Yeah. And that long term planning, probably more important actually than reacting to some of the short-term price moves we're seeing.

00:09:34:00 - 00:09:44:00
Tom Hibbert
Absolutely. You can be tactical here and there, but the long-term opportunity set is what tends to prevail.

00:09:44:00 - 00:10:05:00
Jane Parry
Great. Well, thank you very much. Thank you for your time. Thank you for explaining Stagflation to me. I enjoyed that. And don't forget to follow us on Spotify or Apple or your podcast channel of choice. Just hit follow. You will never miss an episode. If you've got any thoughts, please share them with us or drop Tom an e-mail coffeebreak@canaccord.com. Thank you very much.

00:10:05:00
Speaker 3 
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:24:00
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 delighted to be joined by Tom Hibbert from our Chief Investment Office. Morning, morning.

00:00:24:00 - 00:00:26:00
Tom Hibbert
Morning. Thank you, Jane. Thanks for having me back.

00:00:26:00 - 00:01:27:00
Jane Parry
You're very welcome. So, as you know, each week on our podcast, we try to cut through all the noise, demystify what's going on in a simple and easy to understand manner, and then hopefully you can feel a bit more informed, a bit more confident and more in control of your financial future. Now this week, Tom, we are having a little change of tone and we are taking inspiration from your daughter's bedtime book and you're quoting Dr Seuss at us and why it is an apt parable for the market since the conflict in the Middle East began 6 weeks ago. But before we get into that, we have been talking about what's been going on over there for what feels like longer than six weeks here on the podcast. But there's been a lot of volatility, a lot of headline driven markets. And we're now asking, really, are there any genuine reasons for us to feel a little bit more optimistic, a little bit more cheerful? Or is this just another false dawn? So welcome. 

00:01:27:00 - 00:01:29:00
Tom Hibbert
Let’s kick off with some Dr Seuss.

00:01:29:00 - 00:01:31:00
Jane Parry
Let's do that. Yeah, this week's coffee break. Let's go with that.
 
00:01:31:00 - 00:01:34:00
Tom Hibbert
It's a good comparison I think and reading any Dr Seuss is chaos.

00:01:34:00 - 00:01:36:00
Jane Parry
Right. Especially in your household.

00:01:36:00 - 00:02:20:00
Tom Hibbert
His writing style is chaos, and especially in my household, exactly. Two daughters. It's total chaos, but there was one quote. My daughter’s new favourite book is If I Ran the Circus. Is it my daughter’s favourite? Maybe it's my favourite. Yeah, it's definitely my favourite children's book. But there's the Zuma Zoop troop, it's a trapeze act. And If I Ran the Circus, it's completely chaotic and to quote Dr Seuss, no one knows who will catch which by the what and just where, or just when and just how in which part of the air. I think that's quite comparable for how markets have been behaving in the last few weeks since the conflict began. There have been sharp rotations and - 

00:02:20:00 - 00:02:21:00
Jane Parry
Rotations, remind us?

00:02:21:00 - 00:02:34:00
Tom Hibbert
Oh, they're up hugely one day and the next day they're down again. They've largely followed - the best indicator has been President Trump's tree social account. And markets have been passengers to news flow and passengers to Trump's tree social.

00:02:34:00 - 00:02:50:00
Jane Parry
Definitely high wire trapeze act going on in markets. So, lots of movement, very little certainty and no one's quite sure who's catching what. Very uncomfortable for investors really all round. Anything to cheer us a little bit then?

00:02:50:00 - 00:03:31:00
Tom Hibbert
Yeah, sure. I suppose there are reasons, I mean, I suppose there are obviously reasons to be cautious and there's a lot of uncertainty out there. But a good way of, I think, approaching these periods of uncertainty is to try and look through the fog, and look at what the fundamentals are telling you. And if we look at the fundamentals, those are the things that tend to prevail over the long term. And actually, there are quite a few reasons to be optimistic, looking at those fundamentals, whether that's earnings growth, broader strength in the underlying economic data. We had a little bit of that last week, that kind of shone through the volatility and uncertainty of what's happening from a geo macro perspective.

00:03:31:00 - 00:03:37:00
Jane Parry
So, what's going on then with equities and bonds in the last week then that's cheered you a little?

00:03:37:00 - 00:04:36:00
Tom Hibbert
Yeah, so maybe just to start, I'll say there's been an interesting pattern that's started to emerge in markets, a weekly cycle almost, where markets have started the week quite strong. And then towards the end of the week, they've taken all the risk off because a lot of the geopolitical events, the strikes, the military strikes that have happened have tended to happen over the weekend. So investors haven't wanted to carry risk into the weekend and last week this cycle was quite significantly broken. Also, markets were just positive. So the global equity market rose 3.6% in sterling terms last week. Every sector was in positive territory. There was more optimism in general about a possibility for a ceasefire in the short term and equities and bonds reacted positively to that. But there was also some positive news in terms of what analysts are expecting from companies as we head towards earnings season and in some of the economic data that was reported.

00:04:36:00 - 00:04:44:00
Jane Parry
And was this positivity across all equities, all sectors, all regions, or did some outperform even more?

00:04:44:00 - 00:04:52:00
Tom Hibbert
The parts of the market that have been most sensitive to the conflict move the most.

00:04:52:00 - 00:04:54:00
Jane Parry
OK, upwards.

00:04:54:00 - 00:05:09:00
Tom Hibbert
Yeah, upwards. So materials, real estate and also some of the areas that have been particularly weak as well. So communication services, technology and in the bond market, things like UK gilts, government bonds, we've spoken a lot about that. So we saw yields fall quite sharply last week.

00:05:09:00 - 00:05:36:00
Jane Parry
So, some optimism that both equities and bonds, both areas of the market rallied last week and not being confined to one particular corner of the market, which is a bit more cheering and some optimism coming out of the Middle East. So let's just go back, you mentioned the underlying fundamentals and about that being another reason for us to be optimistic. So what's playing out there? What's going on in the economic backdrop?

00:05:36:00 - 00:05:49:00
Tom Hibbert
Yeah. A few things to note. First is that there was the S&P Global Manufacturing surveys reported and that showed that manufacturing activity has actually continued to expand despite the conflict.

00:05:49:00 -00:05:50:00
Jane Parry
And that's globally.
 
00:05:50:00 - 00:06:27:00
Tom Hibbert
That's globally and it's all split out across regions, but we generally saw sort of an uptick in manufacturing activity pretty much across the globe. So that's a positive. Then you've got some economic data out of the US. We saw a particularly robust US labour market report, 178,000 new jobs created in March. That's the biggest increase since 2024. I need to caveat that a little bit because it's a noisy data set and it's a data set that's set within a broader trend of sort of cooling for the labour market. So there's still some broader negative momentum.

00:06:27:00 - 00:06:30:00
Jane Parry
And they really, they quite often restate those labour market figures in subsequent months.

00:06:30:00 - 00:07:48:00
Tom Hibbert
They've been doing that a lot and, in this report, they also restated the previous numbers. But still it was a much stronger report in aggregates than expected, just set within a sort of negative or trend of cooling for the labour market. And then from a corporate perspective, you know, I've already mentioned it, but we're seeing profit margins continue to edge higher in terms of what analysts are seeing from the companies they cover. And that's going to be a key focus, I think as we head into this quarter's earnings season. I think that the recent improvement in those profit margin expectations has come largely from higher oil price and it's been driven by the energy sector. But even if we strip that out, we're seeing it across the broader markets as well. So, there are a lot of reasons to be optimistic because if markets continue to stay supported from a fundamental standpoint, from a fundamental perspective, that holds them in better stead amongst the periods of broader uncertainty and weakness. It's still early days to say with any certainty what the impact of a potential extended conflict will be for, for all of those things I've spoken about, for the global economy in general. But from a fundamental standpoint, there are reasons to be positive.

00:07:48:00 - 00:07:50:00
Jane Parry
OK, right. We need to balance out this optimism. I, you know, I don't want us to get carried away. The sun might be shining, but what could change this mood, this sense of optimism that you're talking about?

00:07:50:00 - 00:08:22:00
Tom Hibbert
The biggest thing will be out of the way by the time this podcast is released. So this evening 8:00 PM, which is I think 1:00 AM UK time, Wednesday morning, UK time. Trump has this self-imposed deadline on Iran to reopen the Strait of Hormuz. Otherwise, they will strike Iranian energy infrastructure and their infrastructure in general.

00:08:22:00 - 00:08:25:00
Jane Parry
OK, that sounds like a quite a big cloud.

00:08:25:00 - 00:08:37:00
Tom Hibbert
So obviously, although you can be optimistic from a fundamental perspective, we are still in a midst of a very uncertain and quite terrifying.

00:08:37:00 - 00:08:38:00
Jane Parry
A lot of fog.

00:08:38:00 - 00:09:35:00
Tom Hibbert
There's a lot of fog, there's a lot of fog and Europe is not insulated from this, far from it. And at the moment, Europe is pursuing this sort of, this is not our war philosophy, which fundamentally sits in quite stark contrast with economic reality. And that's something that Europe needs to grapple with. At the moment, their focus really remains on trying to reopen the Strait of Hormuz through diplomatic means rather than anything militarily. But they need to balance that sort of diplomacy with the US’ much more militaristic approach. And that's a very difficult balance to strike as any diplomatic efforts that they make could annoy the US if they try and sort of offer concessions to Iran or whatever. So there's a huge amount to balance and a huge amount of uncertainty. But if you try and look through that uncertainty, there's fundamental strength.

00:09:35:00 - 00:09:46:00
Jane Parry
Great. Thank you very much. Well, I think I should briefly sum up what's in my Canaccord take away coffee cup today. As you said, reasons to be cheerful, parts one, two and three, I think there's a song in there somewhere.

00:09:46:00 - 00:09:49:00
Tom Hibbert
We'll come back with that next week.

00:09:49:00 - 00:10:56:00
Jane Parry
Yeah, next week you can sing it for us. Part 1, improved mood music from Iran and hope of a ceasefire. Part 2, business fundamentals, particularly business margins, are remaining resilient. And Part 3, the whole economic backdrop continues to hold up, but clouds do remain on our sunny horizon sadly. The conflict continues, Europe remains exposed to energy risk that we've been talking about over the last few weeks and particularly energy led inflation remains a live concern. But as ever, we keep a close watching brief on behalf of our clients and we'd always say stay invested, stay balanced, but above all, stay awake in these foggy times. So thank you very much. Thank you for your time. I hope you've enjoyed the Canaccord Coffee Break podcast today and a little bit of optimism amongst all the world doom and gloom. Don't forget to hit follow to never miss an episode on Spotify, Apple or your podcast channel of choice. And any thoughts, anything you want to ask us, please drop an e-mail coffeebreak@canaccord.com.

00:10:56:00 - 00:10:58:00
Tom Hibbert
Thank you for your ongoing support everyone.
 
00:10:58:00 - 00:11:00:00
Jane Parry
Thank you.

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

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

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

00:00:23:00 - 00:02:05:00
Jane Parry
Morning, morning. And Tom is our Chief Investment Strategist and he's here to help me cut through all the noise. And there's lots of noise going on around the war in Iran at the moment. So, we're going to cut through that, demystify what's going on in a simple and easy to understand manner. Hopefully, that's the plan. And hopefully then you can feel more informed, more confident and more in control of your financial future. So this week, Tom, markets are telling us two very different stories. So on the surface, equities and the credit markets look calm, but government bonds are flashing some warning signs. So it's that disconnect that I really want to understand and hopefully we can unpack a bit today. So welcome to the Canaccord Coffee Break. Grab your coffee and let's get into it. So as we know, we've been talking about it for the last few weeks. It's been all about rising energy prices because energy is in short supply and all of the news flow obviously coming out of the Middle East. Despite that, really, the headline equity and the credit markets have remained actually pretty resilient, whilst sovereign bonds have weakened sharply. And we talked about that in quite a lot of detail last week with Leah and what the impact on UK gilts was. But I think your commentary this week seems to be that there are two very distinctive narratives now emerging, which is being priced simultaneously in risk assets and in government bonds. So perhaps we can talk a little bit more about that. So first off, just help us just define what are risk assets, what we're referring to when we say that?

00:02:05:00 - 00:02:57:00
Tom Hibbert
Yeah, sure. I suppose risk assets is any investment that is higher risk and that you expect to generate a higher return from. Right now, we've got a lot of uncertainty. So it's not just energy that's in short supply, it's also certainty, right. So, what we're seeing being priced into different markets is this high degree of uncertainty, it's a risk premium. Every couple of days, the geo macro situation has totally changed, shifted, and markets are passengers to the news flow. So that uncertainty means that a higher risk premium is being priced into different assets. And we've seen that a lot in the last few weeks. But as you suggest, it's surprising that risk assets, so equities and credits, have been relatively well contained in in comparison to –

00:02:57:00 - 00:03:02:00
Jane Parry
You’ve got a funny look on your face as you're saying that. You’re sort of frowning.

00:03:02:00 - 00:03:17:00
Tom Hibbert
Yeah, well, it's surprising really. I mean, I don't want to say it's surprising actually.  I'll say it's just interesting that markets have coming into this quite expensive and global equities, they're only down 3.4% year to date in sterling terms.

00:03:17:00 - 00:03:20:00
Jane Parry
So they're not as spooked as you thought they might be perhaps.

00:03:20:00 - 00:03:54:00
Tom Hibbert
No, not particularly. And the UK equity market is broadly flat. Europe's sort of in line with the global market, emerging markets, Japan, actually still in positive territory for the year. US has been the laggard, and it's been the laggard for some time now, particularly driven by some negative momentum within the tech sector. So the US equity markets down sort of 6.6%, but you know, global equity is down 3%. It seems, given everything that's happening, it could be worse really.

00:03:54:00 - 00:04:04:00
Jane Parry
You mentioned credit markets and that they tell a similar story of resilience. So just again define for us what do you mean by credit markets before we go on to talk about them.

00:04:04:00 - 00:04:13:00
Tom Hibbert
Credit risk is - I think of it as a default risk. That you might not be paid back the money, so credit is debt -

00:04:13:00 - 00:04:16:00
Jane Parry
So you're lending money to a company?

00:04:16:00 - 00:05:25:00
Tom Hibbert
It could be an emerging market sovereign that borrows in US dollars. You know, because they're not issuing US dollars themselves, they can't print more to pay back. So that would be credit risk. It might be corporate bonds, so you're lending money to companies. It might be consumer credit, so auto loans or credit card debt or mortgages, that sort of thing. We tend to look at it in the main bulk of that and the main bulk of sort of client exposure would be corporate bonds. And you measure the risk premium in corporate bond markets with how much more you're paid above government bonds, government debt. And that is called a credit spread. And credit spreads, similar to equities, credit spreads have been quite contained. So global high yield, that's the highest risk form of corporate bond that those spreads have, widened about 0.5% on the year so far. So pretty contained relative to history and actually spreads are still quite tight and high-quality companies called investment grade corporate bonds, those spreads have only widened to about 0.8% which is only about 0.1% wider on the year. So we've been very, very contained.

00:05:25:00 - 00:05:41:00
Jane Parry
OK. So that's equities we've covered and the credit markets we've covered. So the other market that we wanted to talk about which is painting a different picture is the government bonds, particularly the UK gilt market. What is going on there then?

00:05:41:00 - 00:05:50:00
Tom Hibbert
Sure. So we've seen yields move quite a lot higher and we've seen that, I mean, particularly in the UK and we've spoken about this a lot on the previous podcasts.

00:05:50:00 - 00:05:53:00
Jane Parry
We were talking about yields getting up to 5% last week.

00:05:53:00 - 00:07:35:00
Tom Hibbert
Yeah, the 10 year, UK ten-year yields, rose above 5% late last week and that is really quite an aggressive shift higher in yields. And it reminds us a little bit - I suppose there are echoes of the 1970s. It's not a perfect parallel because the system, the economic system today, is far more financialised. It's a lot more interconnected; there's a lot more leverage. So yields aren't going to move like they did in the 1970s. They could do, but I think things would break before they moved to those extremes. But if we draw that parallel, you know, the late 1960s, we had this fiscal expansion in the US that was around the time of the Vietnam War, which set the kindling for inflation in the US and monetary policy. Central banks didn't really react. They were too late to react, which allowed inflation to sort of rise. Then we had in the early 1970s, 1971, Richard Nixon abandoned the Bretton Woods system, which anchored the US dollar to gold and other currencies to the US dollar, which then allowed the US dollar to move to a sort of floating rate exchange. It untethered the US dollar, which allowed for sort of further leverage and to fuel, add fuel to the inflationary fires, I suppose. And then you had two energy shocks. You have the Yom Kippur War and the Arab oil embargo, which then, you know, inflation really accelerated. And by 1980, which was the Iranian revolution, 1980, inflation in the US was at 15% or 14.8%. In the UK it was at 21.6. It had been even higher earlier in the cycle. But these are really extreme levels of inflation.

00:07:35:00 - 00:07:44:00
Jane Parry
I can remember that. I can remember my mum and dad talking about it and well, I mean house prices went up a lot, which they thought was a good thing, but yeah, everything else going up they didn't think was so good.

00:07:44:00 - 00:08:53:00
Tom Hibbert
Well, I can't remember that, but it's an interesting period to read about for sure. And particularly relevant today, and people have spoken a lot about the Volcker movement, Paul Volcker. Paul Volcker, who was the Fed chair towards the end of the decade, he raised interest rates in the US above 20%, which finally slayed the inflationary dragon. It restored credibility at central, at the Fed. But the cost was, the short-term cost, was a very deep recession. And it took this very aggressive interest rate hike to finally defeat inflation. So the parallel there, it's not exact, but it's quite instructive. And the bond market, the moves that we've seen have been really quite extreme. And the bond market is obviously worried about this conflict being more persistent and inflation being more persistent. And we haven't seen that priced into risk assets. You're seeing two separate stories. The risk assets are quite calm about the, you know, they don't think that inflation is going to be as structural and become as embedded.

00:08:53:00 - 00:08:56:00
Jane Parry
So therefore they're not reacting price wise.

00:08:56:00
Tom Hibbert
Well they are, but there's not as much of a risk premium. They're still expensive. In absolute terms, those risk assets are still expensive, relatively expensive, and they seem to be assuming that there's more of a light at the end of the tunnel with the conflict and that corporate profitability is still going to be strong and margins are going to be maintained, whereas the bond market is obviously more worried about inflation.

00:09:22:00 - 00:09:25:00
Jane Parry
So is there some ground in the middle of the two?

00:09:25:00 - 00:10:20:00
Tom Hibbert
Yeah, I think there is and I actually think that it's more likely that the equity market is pricing a probable outcome. Obviously, it's difficult to say what the end of the conflict, what the path to the end of the conflict might be like. And even if there is some sort of ceasefire, will the geopolitical risk premium be completely removed from, will oil prices go back to where they were before? It's likely that the geopolitical risk premium won't fully dissipate, that we might still have an elevated oil price. But if it's below where it is today, Brent's at $115, if it goes back to some form of equilibrium, I think that there could easily be a middle ground between these two markets. And actually, equities could recover and do quite well as well. So, I just think the bond market is being very pessimistic at the moment, particularly in the UK.

00:10:20:00 - 00:10:45:00
Jane Parry
Yeah. Great. Well, thank you very much. I think I probably should sum up what's in my Canaccord take away coffee cup this morning. Markets are now pricing in two conflicting narratives. Equities continue to anchor to a softer, more stable outcome from resilient growth, whereas the bond market appears to be focused very much on entrenched inflation risks. But your view is that there's somewhere in between the two that we might get to.

00:10:45:00 - 00:10:56:00
Tom Hibbert
Yeah. I think that the equity and credit markets still look, they look sensible, the pricing is sensible. I think there is a particular, you know, I think gilts particularly look quite attractive at this stage.

00:10:56:00 - 00:11:20:00
Jane Parry
Yeah. I did enjoy our little look back to the 1970s and although we're not claiming that history is repeating itself, although I do like kind of thinking about flares and the disco revival, we are recognising that some of the same pressures could be re-emerging and inflation could be driven by energy, by geopolitics, but not necessarily by excess demand. So different challenges to address there.

00:11:20:00 - 00:11:21:00
Tom Hibbert
Yeah, that's exactly right.

00:11:21:00 - 00:11:54:00
Jane Parry
And only time will tell, I guess. And as ever, we're trying to look through all this noise and reward perspective, diversification and discipline to meet our clients long term goals. And if, in that, if we can help in any way, please do get in touch. So thank you very much for your time today. We hope you enjoyed the Canaccord Coffee Break Podcast. And don't forget to hit follow, never miss an episode. We're on Spotify, Apple, or your podcast channel of choice and do share your thoughts with us, coffeebreak@canaccord.com. Thank you.

00:11:54:00 - 00:11:55:00
Tom Hibbert
Thank you.

00:11:55:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:25:00
Jane Parry
Good morning, and welcome to this week's Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And this week I'm delighted to be joined by Leah Bramwell from our Chief Investment Office. Morning, morning.

00:00:25:00 - 00:00:26:00
Leah Bramwell 
Morning, Jane. Thanks for having me.

00:00:26:00 - 00:01:23:00
Jane Parry
Leah is our Head of Tailored Investment Solutions and she's here to talk with me about what's going on in the markets this week to hopefully cut through a bit of the noise, demystify what's going on in a simple and easy to understand manner, and then hopefully you can feel a bit more informed, more confident and more in control of your financial future. So, this week, while the battle over the Strait of Hormuz rumbles on and the energy shock continues to dominate, we're actually going to focus on some different reactions to that energy shock inflation that we've been talking about in the last couple of weeks, that supply side shock. And in particular this week, we're going to look at what that means for interest rates and particularly the fact that the 10 year UK gilt, the yield on that gilt is approaching 5%, which is the highest level we've seen since about 2008.

00:01:23:00 - 00:01:42:00
Leah Bramwell
Exactly right. So, as you say, we've had some developments on the interest rate front this week. We've had central banks meeting. All three. So lots of central bank news floating around to go alongside what's continuing to rumble in the Middle East.

00:01:42:00 - 00:01:55:00
Jane Parry
Great. Well, let's grab our coffees and let's dive on in. Do you want to briefly touch on the Strait of Hormuz and what's going on in the war?  Before we dive into straits or?

00:01:55:00 - 00:02:29:00
Leah Bramwell
Well, by the time this goes out, we may be well out of date. You know, you never know. It's obviously changing very rapidly and lots of rhetoric flying around on deadlines and no longer deadlines and extended deadlines. And I think the main thing to bear in mind is that at the moment, at the time of recording, things are still very uncertain and things are I would say not no longer escalating but not de-escalating either at the moment. And markets are reflecting that level of uncertainty and continue to be very volatile.

00:02:29:00 - 00:03:03:00
Jane Parry
OK, thank you. So perhaps the, I don't know if I can call it the biggest story this week, but let's turn to what's happening with interest rates. And in the last couple of weeks with Tom, we've talked about how geopolitics can affect the path of interest rates. Since then, as we mentioned at the beginning, the UK, the US and the European central banks have all met and have all chosen to hold rates steady. But the reactions couldn't have been more different really from what I could gather. So perhaps that's this week's real story. So, would you just give us a little bit more information about that? Tell me a little bit more.

00:03:03:00 - 00:03:41:00
Leah Bramwell
Absolutely. So, I think the central bank guidance and commentary that came out after the meetings was probably the more interesting story for investors rather than the actual holding of rates. And investors were really looking deeply into the commentary that that came alongside for any clues on how central banks were thinking about things. I think at this juncture, it's really important to note that it's very, very clear that it's an uncertain environment. And for most central banks, the sensible option is to take a step back, hold on, hold rates and see what's going on.

00:03:41:00 - 00:03:43:00
Jane Parry
Take a deep breath.

00:03:43:00 - 00:04:16:00
Leah Bramwell
Take a deep breath, exactly. You know, they are facing a significant supply side shock on energy prices, which can have potentially significant impacts on inflation, varying by countries. So in the US they are slightly more dependent on their own energy, whereas the UK and Europe are both more impacted by global energy prices. So perhaps explaining some of the differences in the level of concern around the impact of rising prices on domestic inflation.

00:04:16:00 - 00:04:27:00
Jane Parry
So let's maybe let's go into the UK in a little bit more detail. So, the UK gilt markets were at the centre of the reaction. So, what's going on with the UK?

00:04:27:00 - 00:05:00:00
Leah Bramwell
Yes, exactly. So, we've gone from last month where we had a split vote from the Monetary Policy Committee, which is the committee which sets interest rates at the Bank of England. We had a split vote, a very tight vote on whether the Bank of England was going to cut rates further. This month, we had a unanimous 9 zero vote to hold rates where they were and investors interpreted that as a move to a more hawkish position from the Bank of England, hawkish being inclined to raise rates, dovish being inclined to reduce.

00:05:00:00 - 00:05:07:00
Jane Parry
Oh yeah, in the past I’ve had to remember this by hawks fly high, doves fly a bit lower.

00:05:07:00 - 00:05:17:00
Leah Bramwell
Exactly. So, investors interpreted this as a shift in tone from the Bank of England moving towards higher interest rates rather than lower interest rates.

00:05:17:00 - 00:05:26:00
Jane Parry
It's quite a considerable move when you say last month, just last month, it was a bit more of a split vote rather than all voting for hold this month.

00:05:26:00 - 00:06:27:00
Leah Bramwell
Exactly. At the beginning of the year, markets were expecting two interest rate, two further interest rate cuts from the Bank of England. And markets now following this meeting last week are pricing three increases to interest rates. So, a huge swing from where we were three months ago to where we are today, a massive change. And I think we are feeling that that is not at all reflective of the fundamental state of the UK economy. Growth is slow, unemployment is rising and inflation prior to this shock had been moderating. So, it's our view that the Bank of England will look through this this shock and they will continue to focus on the domestic economy. Now, obviously if this shock endures and carries on and the supply side becomes more constrained and we look at sort of second and third order effects, and inflation can be impacted heavily by that, then the Bank of England may need to act - 

00:06:27:00 - 00:06:29:00
Jane Parry
But that's a different scenario.

00:06:29:00 - 00:06:36:00
Leah Bramwell
Different scenario, exactly, and the one we're currently expecting is our sort of base scenario.

00:06:36:00 - 00:06:44:00
Jane Parry
So the impact on gilts. And this is UK government gilts. What's the situation there and how's this playing out?

00:06:44:00 - 00:07:21:00
Leah Bramwell
Yeah. So gilt prices have come down, yields have gone up. So, yields and prices for bonds move inversely. So we've seen interest rates go up. So, the return on offer from gilts has increased as prices have come down and we think that's a really compelling opportunity for investors at the current time. Some of these levels we haven't seen since sort of 2008. And we think that that's a really good opportunity for clients with a long-term horizon to look through this volatility and to top up in some areas of the market there.

00:07:21:00 - 00:07:34:00
Jane Parry
Because if I think about it, I've got some money in the building society, which is not anywhere near 5%. And I'm paying tax on that interest rate that I'm earning as well.

00:07:34:00 - 00:08:02:00
Leah Bramwell
Exactly. So if you've got money in a bank or a building society savings account, it's highly likely that you're not getting anywhere near that level. Now, if you're very proactive and you've moved around and you've found the best deal, it's possible that you're getting somewhere close to that. But it is taxable, yeah, for most people. Whereas if you were to invest in a gilt and there's different components of return of a gilt which we can touch upon, you're much more likely to get a much higher level of post-tax return.

00:08:02:00 - 00:08:15:00
Jane Parry
OK. So you mentioned there the different components of the return you get from a gilt. So I'm guessing you're talking about the mix of the yield, or the coupon, which is the interest rate, isn't it?

00:08:15:00 - 00:08:57:00
Leah Bramwell
Exactly. So if you think of a gilt, there's two elements of a return. You've got your interest rate, the coupon as you say, and then you've got any capital gain associated with holding a gilt. So, when you buy a gilt, you will pay a certain price. Let's say you pay 90 pence for a gilt when it redeems, matures, basically when the government pays you the money back that you have lent it, it will redeem at 100 pence in the pound. And so you've got that capital return which might be split over a number of years, and then you've got the annual return coming from your coupon, your interest rate.

00:08:57:00 - 00:08:59:00
Jane Parry
And those two things combined -

00:08:59:00 - 00:09:44:00
Leah Bramwell
Those two things combined make your overall return from holding your gilt. Now it's interesting, UK gilts are not subject to capital gains tax on capital gains from a gilt. And so if you are somebody who is holding cash not in an ISA wrapper or within a pension wrapper, but in a taxable environment, if you are buying a gilt which has a low coupon, so there are gilts which have low coupons and so more of that return comes from the capital element of the bond, then that is a very tax-efficient way of generating return particularly for higher additional rate taxpayers

00:09:44:00 - 00:09:50:00
Jane Parry
OK, interesting. Particularly pertinent at this time of year as we get to the end of the tax year.

00:09:50:00 - 00:10:30:00
Leah Bramwell
Exactly, exactly. And I think what's really, really important to note is there's a lot of noise going on at the moment in markets around the world, geopolitics. We are approaching the end of the tax year. We've got about two weeks left. We really are advising clients that they need to think about their long term goals, think about their long term planning needs and make sure that they're not distracted from ISA contributions, from pension contributions, from making sure that any taxable money is appropriately invested in the most tax-efficient way to generate the best possible returns for themselves on a long term view. It's really, really important not to lose sight of those things.

00:10:30:00 - 00:11:00:00
Jane Parry
Yeah. So I mean, of course we're talking about UK residents, UK taxpayers, but yeah, definitely worth looking at what you're invested in at the moment because there's always going to be, you know, tariffs or conflicts or COVID or something going on in the markets.  So, I guess in the same way that we are hoping the central bankers to look through some of this inflation noise, likewise we perhaps should be looking through this noise as investors and keeping going with our long-term plans. As Andrew Bailey said this week, keep calm and carry on.

00:11:00:00 - 00:11:12:00
Leah Bramwell
Exactly. Exactly right. And three weeks ago, four weeks ago, all we could talk about was AI and AI disruption and which company, which industry was going to be next.

00:11:12:00 - 00:11:14:00
Jane Parry
We seem to have forgotten about that.

00:11:14:00 - 00:11:15:00
Leah Bramwell
Everybody's forgotten about that.

00:11:15:00 - 00:11:17:00
Jane Parry
I’m sure it will be back, don't worry.

00:11:17:00 - 00:11:19:00
Leah Bramwell
I'm sure, I'm sure next month that will be the topic again.

00:11:19:00 - 00:11:56:00
Jane Parry
So, thank you very much indeed for your time. Let me just sum up what's in my Canaccord take away coffee cup today. I think I've got a whole bunch of gilts in there, maybe paying 5% and I'll perhaps have them alongside my double espresso, keep me going. So energy risk is still high, but markets are pretty orderly, I think we said. Central banks on hold, they're taking a breath despite what's going on in the world. And amongst all this noise, there are some high-quality gilt opportunities out there, especially sort of in the three-to-10-year maturity space and probably looking genuinely attractive again.

00:11:56:00 - 00:11:59:00
Leah Bramwell
Summed up perfectly Jane

00:11:59:00 - 00:12:21:00
Jane Parry
Great. So, thank you very much for your time. I do hope everyone's enjoyed the Coffee Break podcast today. Don't forget to hit follow so you never miss an episode. We're on Spotify or Apple or lots of other podcast channels as well. And if you have any questions, you want to share your thoughts, please do drop us an email coffeebreak@canaccord.com. Thank you very much.

00:12:21:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 – 00:00:25:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I'm delighted to be joined again this week by Tom Hibbert, our Chief Investment Strategist from the Chief Investment Office.

00:00:25:00 – 00:00:26:00
Tom Hibbert
Hello everyone, good to be here again.

00:00:26:00 - 00:00:50:00
Jane Parry
And as our regular listeners will know, we are here to really try and cut through all the noise. And there is indeed a lot of noise going on at the moment. Demystify what's going on in a simple and easy to understand manner. And hopefully then you can feel a bit more informed, a bit more confident and more in control of your financial future. So this week, it feels like a bit of a Part 2 of last week's podcast.

00:00:50:00 - 00:00:51:00
Tom Hibbert
Yeah, it is.

00:00:51:00 - 00:01:12:00
Jane Parry
And we are focusing on the single biggest pressure point on global markets at the moment, which is the battle for the Strait of Hormuz and what it's doing to inflation, oil and interest rates. So let's grab your coffee and let's dive on in there into that Strait of Hormuz. So what is actually happening here, Tom, and why?

00:01:12:00 - 00:02:12:00
Tom Hibbert
Yeah. So the Strait of Hormuz is the key linchpin of the conflict. And that is because it's so important for global energy supply and trade. Roughly 1/5 of global oil and natural gas flows through the Strait and about 5% of global trade. So the fact that it's been paralysed on the back of this conflict represents a significant supply side shock. And as I say, it's become the main sort of linchpin of the conflict with both sides. You know, Iran wants to keep the Strait closed and the US desperately wants to reopen it and alleviate the supply chain pressures. So the longer the straight remains disrupted, the greater the risks that this energy shock spreads through supply chains and generates a broader sort of inflationary surge or that it becomes a structural inflationary surge.

00:02:12:00 - 00:02:20:00
Jane Parry
I guess because it's not just about the price of oil itself, it's that when oil spikes, that seeps into every corner of the economy because it's just the basis for so many.

00:02:20:00 - 00:02:37:00
Tom Hibbert
Oil is basically - everything is a derivative of oil. Even other commodities are derivatives of oil because oil is the main thing that is used in their extraction and processing, for example. So, you know, and energy is so central to the global economy.

00:02:37:00 - 00:02:45:00
Jane Parry
Yeah, hence a big issue.  And so specifically about oil prices, what's going on in this this fog of war?

00:02:45:00 - 00:04:33:00
Tom Hibbert
Yes, we're seeing a lot of volatility and you know, you look, on Monday alone, we saw massive moves and the Brent crude price surged to $120.00 a barrel before falling back down again on the same day. And it was again soft on Tuesday when Trump came out and said that the war was nearly over. And, you know, then sort of reality struck again and it rose again. So that the oil price is still, the Brent oil price is still above $100, which is a significant rise. And the Iran shock now sort of makes up about 1/3 of today's oil price. It's a really significant premium on the back of this shock. So Iran's, I think their strategy now is that they want this conflict to be as prolonged as possible. For them, it's about resilience. And the longer that they can keep the conflict going, they can stay resilient, and the longer oil prices remain elevated and the Strait of Hormuz remains closed, the US’ resolve for war will be eroded. And it'll increase the sort of international and domestic pressure within the US to strike a deal or to somehow bring an end to the conflict. And, you know, you see these things with wars. Wars are easy to start, very easy to start. They're quite difficult to finish. We've seen that, you know, Putin thought his invasion of Ukraine would be a very short affair. And, you know, however many years later, it's still going on. So, you know, I think the US, there's a danger that this conflict becomes –

00:04:33:00 - 00:04:37:00
Jane Parry
But there's been a bit of shift in tone, hasn't there, from President Trump this week.

00:04:37:00 - 00:05:09:00
Tom Hibbert
Yeah, good point actually. So, you know, obviously the main goal of the administration was they want low energy prices, they want low oil prices. And he really spoke about that. And suddenly now he's like, first he was saying higher energy prices are a reasonable cost for the destruction of the IRGC, the Iranian regime, effectively. And now he's saying, actually, high oil prices are great for America because we're a net oil exporter. And we are, you know, very energy independent.

00:05:09:00 - 00:05:13:00
Jane Parry
So what is that, is that economic positioning? Is it political messaging?

00:05:13:00 - 00:05:27:00
Tom Hibbert
I think it's pure political posturing. Trump is very prone to that, isn't he? I wouldn’t say he’s good at it or he does it very obviously, doesn't he? Everyone can see what he's doing. 

00:05:27:00 - 00:05:55:00
Jane Parry
So last week we talked about the upward pressure on short-dated bond yields, particularly here in the UK, because we're the opposite of the US I guess, we have a lot less energy resilience and greater sensitivity to energy prices. So just a reminder, when gilt yields rise, markets are pricing in higher interest rates or delays to the cuts that everyone was expecting.

00:05:55:00 - 00:06:42:00
Tom Hibbert
Yes, that's right. And we've seen a lot of upward pressure on short dated gilt yields. So you know that reflects more of the sort of short-term interest rate trajectory. So the market, so the two-year gilt yield for example has risen from 3.5% percent at the end of February to 4, a little over 4%, 4.1% at the moment. So that's an increase of over 0.6%, 60 basis points. And that if you compare that to the US, we've seen a rise, but only 30 basis points, so half the size. And in in Germany, which is another sort of key European bond market, a 40-basis point rise. So the UK has been substantially more. We spoke about that last week, but you know, it's good to be aware of that dynamic.

00:06:42:00 - 00:06:49:00
Jane Parry
So what does that mean then for the trajectory of interest rates? You know, perhaps if we start –

00:06:49:00 - 00:08:12:00
Tom Hibbert
Yeah, if we look more broad, I think we focused so much on the UK last week. I think this week we now have three major central bank meetings. We've got the Federal Reserve in the US on Wednesday. We've got the Bank of England on Thursday; we've got the European Central Bank on Thursday as well. So I think we can do a sort of broader investigation this week and you know, the Bank of England will just nail that one quickly. They were expected to cut rates at their meeting this Thursday. That is now very unlikely and markets are even, you know, starting to price the possibility of rate increases this year, which I think is a little bit premature given the negative momentum in the UK economy. We spoke about that last week. The Federal Reserve, if we look at the US, this is really interesting, much more comfortable looking through the shock because they're more energy independent. They have this vast oil reserve. They're net oil exporters. The biggest oil producing nation in the world. The US economy is more insulated from the shock. But also, if you listen to people on the FOMC, which makes interest rate policy. Governor Christopher Waller has said that the energy spike is a one-off event. They'll look through the supply side shock and the FOMC as Kevin Walsh is going to be the next Fed chair, he's more likely to look through the supply side shock. So the Fed I think is 
 
00:08:12:00 - 00:08:15:00
Jane Parry
So they don't see it as the beginning of sustained inflation.

00:08:15:00 - 00:08:52:00
Tom Hibbert
No. And we've got again you've got negative momentum in the labour market. So the US nonfarm payrolls report last week was surprisingly weak. It's a volatile measure. So it was surprisingly strong in January. But putting that aside, there is a significant sort of deterioration, not an extreme deterioration, but quite a significant deterioration in the labour market that I think means that a rate cut would be welcomed by the market here. And the FOMC is in a better position and more sort of open-minded about potentially obliging and providing that rate cut. So the Fed's more likely to look through it.

00:08:52:00 - 00:08:53:00
Jane Parry
Then Europe?

00:08:53:00 - 00:09:50:00
Tom Hibbert
So, the ECB is in a different position because they've already cut rates quite significantly, they were already at what they perceived to be the neutral rate, whereas the Fed and the Bank of England were still restrictive. So still fighting the battle against inflation. Europe were already at neutral. So now they are. I mean, President Christine Lagarde has struck a more hawkish tone in response. So she's emphasising that the European Central Bank would act to prevent a repeat of the previous inflation surge. So I would say relative to the Federal Reserve, the ECB is now prioritising inflation, whereas the Fed is, we think this is a supply side shock. We're going to look through it and are more likely to cut rates. The ECB is saying we might have to hike rates and we would do that if we deem it necessary.

00:09:50:00 - 00:09:52:00
Jane Parry
OK. So all quite different across the three different -

00:09:52:00 - 00:09:58:00
Tom Hibbert
I think there's an interesting divergent which is, you know, dependent on what policy is at the moment and what the outlook is.

00:09:58:00 - 00:10:01:00
Jane Parry
And so the CIO will be keeping an eye on that over the next week

00:10:01:00 - 00:10:53:00
Tom Hibbert
Exactly. I think that's the key thing. I mean, for me particularly because we've had good guidance from the Fed and we've had, you know, signals from the ECB, I haven't seen the same from the Bank of England yet. So, the key thing I'm watching this week is what will be the guidance from the Bank of England on the back of what I expect them to hold rates. I think a great cut now is unlikely. But how are they approaching and thinking about this energy shock and what is the new what, what is the new interest rate trajectory in the new world that we have? I mean, a month ago, the world looked completely different. So central banks are recalibrating and the market is trying to garner what the interest rate outlook is in this new world. It's really fascinating at the moment, there's lots going on, but that for me this week is the key thing to look at.

00:10:53:00 - 00:11:27:00
Jane Parry
Thank you. So let me sum up what is in my Canaccord take away coffee cup this week. The Strait of Hormuz is now the global inflation trigger point, talked about that. Oil remains highly elevated and that's likely to keep inflation and interest rates higher for longer. Although we've talked about different situations across the UK, the US and Europe and markets remain volatile really because of all this that's going on. So as usual, we would say diversification, stay invested. Those are the things that remain key.

00:11:27:00 - 00:11:38:00
Tom Hibbert
Absolutely. I mean markets have been broadly quite resilient still and you know the corporate landscape is still very strong. So, stay invested, I think is a good message.

00:11:38:00 - 00:11:59:00
Jane Parry
Thank you. Great. Well, I hope you enjoyed the Canaccord Coffee Break podcast today. Don't forget to hit follow so you never miss an episode on Spotify, Apple, or your podcast channel of choice. If you've got any thoughts you want to share, any questions you want to ask Tom, please do drop us an e-mail at coffeebreak@canaccord.com.

00:11:59:00 - 00:12:02:00
Tom Hibbert
Thanks, Jane. Thanks for listening everyone.

00:12:02:00
Speaker 3 
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal entity. It is accurate at the time of recording and is subject 

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

00:00:24:00 - 00:00:25:00
Tom Hibbert
Morning, everyone.

00:00:25:00 - 00:00:58:00
Jane Parry
Welcome back, Tom. Haven't seen you for a couple of weeks. So, as you know, each week we try to cut through the noise on the podcast to demystify what's going on in a simple and easy to understand manner. And hopefully then you can feel more informed, more confident and more in control of your financial future. This week, Tom, I want to get into UK bonds in particular. They have just had their worst week in years. So, this all feels a little bit counterintuitive to me because inflation looks like it's falling. So, I want to understand really what's going on. I'm sure our clients do as well.

00:00:58:00 - 00:01:00:00
Tom Hibbert
Well, there's a lot going on out there, isn't there?

00:01:00:00 - 00:01:03:00
Jane Parry
There is a lot going on out there.

00:01:03:00 - 00:01:16:00
Tom Hibbert
From a geopolitical standpoint, but I think the most interesting thing to focus on is, you're right, the reaction in UK government bond markets, the gilt market has been fascinating and there's a quite interesting angle for us to explore there.

00:01:16:00 - 00:01:48:00
Jane Parry
OK, let's do that then. Let’s grab a coffee because it sounds like we might need our caffeine for this one, and let's dive in. So, we know that the conflict in Iran has intensified in the last week or so, which has sent energy prices sharply higher. And obviously the potential that that's going to remain the case for some time to come. I think other commodity markets have struggled a bit. We've talked about gold, silver and copper in previous weeks, but they've ended a bit lower.

00:01:48:00 - 00:01:51:00
Tom Hibbert
Everything has struggled pretty much except for energy.

00:01:51:00 - 00:01:52:00
Jane Parry
So nowhere to hide.

00:01:52:00 - 00:02:03:00
Tom Hibbert
And the US dollar has been the only sort of pure safe haven play. So global equities in sterling terms down 3%, helped a little bit by the strengthening of the US dollar.

00:02:03:00 - 00:02:12:00
Jane Parry
So, let's get into it then. What has caused this deterioration then in the UK government bonds?

00:02:12:00 - 00:02:33:00
Tom Hibbert
Yeah, so geopolitical, I mean the conflict in Iran expanded. Iran continued to strike other Gulf states. Trump said over the weekend that he wouldn't accept anything short of the unconditional surrender of the Iranian regime. So that conflict is obviously escalating and that's in all the mainstream media. The UK bond market has been particularly sensitive to this.

00:02:33:00 - 00:02:40:00
Jane Parry
Why is that then? Why is the UK particularly vulnerable then?

00:02:40:00 - 00:03:08:00
Tom Hibbert
Yeah, so one of the reasons is obviously higher energy means higher inflation and the UK hasn't fully slain the inflationary dragon. As you know, inflation's a lot lower in Europe and it's still struggling in the UK at 3%. It's been coming down, but still at 3%. And the UK has a little bit more energy uncertainty as well. So, you know, the Telegraph reported over the weekends that the UK only had two days left of natural gas supply.

00:03:08:00 - 00:03:11:00
Jane Parry
Two days? That doesn’t sound like a lot.

00:03:11:00 - 00:03:26:00
Tom Hibbert
No, no, and not if you have much higher prices. Natural gas prices are up now 160% year to date, having risen 100% in the last week. You then have to replenish those supplies at very high prices and pay a big premium as well.

00:03:26:00 - 00:03:28:00
Jane Parry
Yeah, that makes sense.

00:03:28:00 - 00:03:53:00
Tom Hibbert
So that implies higher inflation in the UK and we've seen oil prices spike as well. So Brent, which is the sort of global oil price, spiked to 108 dollars a barrel. So, all of that raises this sustained energy driven inflationary shock in the UK in particular and we've seen that really concentrated unwind in the UK government bond market.

00:03:53:00 - 00:03:58:00
Jane Parry
And I also suspect whatever's going on in the Strait of how do you say it?

00:03:58:00 - 00:04:27:00
Tom Hibbert
The Strait of Hormuz. Yeah, exactly. So the strait of Hormuz, 1/5 of global oil shipping goes through there, 5% of all global trade. So it's not just energy, all global trade as well goes through there and it impacts trade between Asia and Europe and global trade, so it has global consequences, not just energy, but particularly with conflict in the Middle East, particularly concentrated in the oil market and energy markets globally.

00:04:27:00 - 00:04:50:00
Jane Parry
So I am reminded actually of the 2022 crisis when Russia invaded Ukraine. I remember all our household energy prices going up and I've been thinking about how many times I put on my tumble dryer and that sort of thing. So, what is the difference then between the macro backdrop then versus now and how the markets and particularly UK bond markets have reacted then?

00:04:50:00 - 00:04:58:00
Tom Hibbert
Yeah, this is the really interesting comparison. So you've got two energy shocks and two polar opposite market reactions.

00:04:58:00 - 00:05:00:00
Jane Parry
OK. What 2022 versus?

00:05:00:00 - 00:05:35:00
Tom Hibbert
2022 versus today. So when Russia invaded Ukraine and energy prices surged, inflation in the UK was already at 6.2%. Or in February 2022, inflation hit 6.2%. That that was already driven by strong demand, a lot of wage growth, a very tight labour market. We were already in the midst of this global inflationary surge, you know, after reopening the economy from global economy from COVID, the Bank of England was behind the curve. So they'd only just started raising rates, so that month they raised their target rate to 0.5% 

00:05:35:00 - 00:05:37:00
Jane Parry
To try and restrict demand.

00:05:37:00 - 00:06:51:00
Tom Hibbert
So the difference between the base rate and inflation is called the real rate, that's -5.7% at the time Russia invaded Ukraine. So deeply negative. And that just shows how far behind the curve the Bank of England was at that point. The labour market was already tight, as I said. So the energy shock was hitting an already overheating UK economy. The bond market at that moment reacted positively. So the bond market focused entirely on the growth shock and ignored the inflation aspects. And you know, the two-year gilt yield for example, it fell from 1.3% to 0.8% in a matter of days. So, at that point the market got the reaction function totally wrong. It should have been much more worried about inflation and the fact that the Bank of England was massively behind the curve than they were. Now if you compare that to today, to the Iran crisis, you've had very similar energy shock, but the backdrop is very different. So the policy rate, rather than being 0.5% like it was then, 3.75% and inflation is at 3%. 

00:06:51:00 - 00:06:53:00
Jane Parry
So that's net positive now.

00:06:53:00 - 00:07:49:00
Tom Hibbert
Yeah. So the Bank of England is now coming from a more restrictive stance. And you've got negative momentum in the UK economy. You've got falling inflation. Unemployment, for example, is above 5% in the UK, which is the highest since the pandemic and youth unemployment's heading towards 16%. So, the economic backdrop is very different. And because it's a supply side shock with energy price rising. I mean, the Bank of England raising interest rates isn't going to increase the flow of oil through the Strait of Hormuz. So the Bank of England can't impact supply through changing interest rates, which means there's more incentive for them to look through an energy shock because there's no clear mechanism for that energy shock, supply side shock, to shift into the labour market because there's a lot of weakness there.

00:07:49:00 - 00:07:54:00
Jane Parry
So how do you then explain what's happened in the bond market?

00:07:54:00 - 00:08:02:00
Tom Hibbert
So the bond market reaction this time around was the opposite. It was almost like it was reacting in the way that it should have done to the Russia-Ukraine invasion.

00:08:02:00 - 00:08:05:00
Jane Parry
Just shows you that the market's just not logical.

00:08:05:00 - 00:08:33:00
Tom Hibbert
Not logical in, in my view. I have very humble opinion because you can be quickly humbled by the market. But the two-year yield rose for example from 3 1/2 percent to above 4%, but rose significantly versus nought versus falling from 1.3 to 0.8 in 2022. So totally the opposite reaction from a much higher base. Markets also totally raise the probability that the Bank of England would cut rates in March.

00:08:33:00 - 00:08:35:00
Jane Parry
So now it thinks they might.

00:08:35:00 - 00:08:57:00
Tom Hibbert
So now the market actually thinks they might raise rates, which I just don't see the Bank of England doing that, reacting in a hawkish way to a supply side shock. So in our view there's quite good value now in UK government bonds and I think that the market reaction function in this instance has again, I think, got it wrong.

00:08:57:00 - 00:09:03:00
Jane Parry
So in this context, then, what are the key questions that we should be asking, should the conflict continue?

00:09:03:00 - 00:09:33:00
Tom Hibbert
Yes, if there is a chance that obviously the conflict continues, you've got a number of key variables like you know, no one knows the extent of the Iranians’ remaining firepower. How many drones do they have left? What are the air defences of the other Gulf States and what's the US military resolve so this could go on for a long time, and maybe we do see sustained volatility and energy markets.

00:09:33:00 - 00:09:49:00
Jane Parry
So just on that then, obviously we are here to try and help clients and investment portfolios. So, what's the impact of all of this? What actions are we taking or what are we actually not reacting to as a result of this crisis?

00:09:49:00 - 00:10:24:00
Tom Hibbert
Yeah, I mean, the way that we've reacted so far given the rise in gilt yields and I think they offer good value now. So gilts look quite interesting to us at the moment. We haven't seen a massive reaction in a lot of risk assets, equities, that global equity return of -3% last week softened a little bit by the strength of the US dollar. So, in US dollar terms, global equities were a little bit weaker, but we haven't seen a major sell off yet.

00:10:24:00 - 00:10:26:00
Jane Parry
So it’s the usual sort of sit tight, sit balanced.

00:10:26:00 - 00:11:39:00
Tom Hibbert
Sit tight. We are defensive and diversified in portfolios. We've reduced within fixed income. We have historically had a big bias towards credit, which is a riskier form of fixed income. We've been reducing that.  Credit is rather than lending money to developed market sovereigns like the UK or the US, we are lending to companies or emerging market sovereigns, mostly corporates. And we've been reducing that allocation in recent months. And we've done that further again in the last week because credit has been, we haven't seen really a deterioration in credit markets yet. So there's no penalty for reducing your credit risk. But the pain has been in sovereign bonds and actually I think they offer quite good value. So, we've been reducing credit and adding to our sovereign bond, particularly UK gilt exposure, at the moment. But other than that, you know, I wouldn't, I don't think you need to take any major steps. Sometimes there's just a bit of uncertainty, a bit of volatility. Stay diversified and on your toes.

00:11:39:00 - 00:12:21:00
Jane Parry
Great. Well, thank you very much. So let me sum up briefly what's in my takeaway Canaccord coffee cup today. So, whilst the conflict in Iran is escalating and having a significant impact on energy prices, it's particularly impacted UK government bonds amid concerns about a renewed inflation shock. Which we think might be misplaced, might be overdone, but let's see where we go. Periods like this always feel a bit uncomfortable, I think. But discomfort does not always mean danger. And as we always say, stay invested, stay balanced, but above all, stay awake. So thank you. Thank you for your time.

00:12:21:00 - 00:12:23:00
Tom Hibbert
Thank you very much.

00:12:23:00 - 00:12:34:00
Jane Parry
I hope you enjoyed the Coffee Break podcast today and don't forget to hit follow if you want to never miss an episode. I'm sure you never want to miss an episode and share your thoughts with us coffeebreak@canaccord.com. Many thanks.

00:12:34:00 - 00:12:37:00
Tom Hibbert
Thanks for listening everyone.

00:12:37:00
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.

00:00:09:00 - 00:00:28:00
Jane Parry
Hello, I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. And I'm delighted to be back on the Coffee Break podcast today after a couple of weeks off and to be joined by Leah Bramwell, who is our Head of Tailored Investment Solutions. Morning, morning.

00:00:28:00 - 00:00:30:00
Leah Bramwell
Good morning, Jane. Thank you for having me back. 
 
00:00:30:00 - 00:02:01:00
Jane Parry
Nice to see you. So, as you know, this podcast is based on our weekly markets review and aims to cut through the noise, demystify what's going on in a simple and easy to understand manner. So hopefully you can feel a bit more informed, more confident and more in control of your financial future, which, given what's been going on in the last few days in the Middle East, is more relevant than ever, I would say. So, if you like what you're hearing, don't forget to follow us on Spotify or Apple or your podcast channel of choice. And you will never miss an episode. So welcome and let's get into it. Grab your coffee and listen in for about the next 10 minutes. So as I mentioned, this week we are obviously looking at the sharp rise in market volatility following the dramatic escalation of the geopolitical tensions in the Middle East. So beyond the very real human cost, investors are worried about energy supplies and how the market behaves when uncertainty spikes like this. So today is about understanding what's moving the markets and what investors should and shouldn't do next. So first off, Leah, perhaps you can tell us a little bit more about how the markets have initially reacted to the tensions in the Middle East, accepting that things are moving very fast. So, what we say in record right now might change within the next day or two, but let's go with that for now.

00:02:01:00 - 00:02:13:00
Leah Bramwell
Absolutely, Jane. So, as you say, it's a very interesting week for markets and escalation like we have seen would usually trigger a global risk off positioning.

00:02:13:00 - 00:02:14:00
Jane Parry
Risk off?

00:02:14:00 - 00:02:49:00
Leah Bramwell
So moving away from risky assets, traditionally equities, and moving towards something more stable. So, historically, examples of those types of assets might be government bonds, viewed as much safer, more stable; gold would be another example; safe haven currencies, so the US dollar, the Japanese yen, those types of areas which in the past, in past conflicts like this, have given stability and lower volatility as uncertainty increases.

00:02:49:00 - 00:02:54:00
Jane Parry
So what else is going on in the market? Just lots of volatility across the board?

00:02:54:00 - 00:04:00:00
Leah Bramwell
Yeah so equity markets yesterday, Monday, started the week orderly, but reflecting uncertainty. So most markets were down 2-4% except the US, interestingly, which was roughly flat. Today, Tuesday, markets down a similar amount and futures, so the indication of what's going to happen when the US equity market opens, showing that the US will also be down a similar amount on market opening. So equities down, the US dollar has been strong. That's probably the strongest safe haven trade that we've seen so far. So the US dollar looking stronger versus most other currencies. Gold initially did rally. So gold initially was up around 3% yesterday, Monday, but came down and it's down slightly today. So that safe haven trade not playing out perhaps as one would expect. And then finally bonds where one might expect to see.

00:04:00:00 - 00:04:02:00
Jane Parry
Like corporate bonds?

00:04:02:00 - 00:04:48:00
Leah Bramwell
Well, both government bonds and corporate bonds, government bonds in particular, we would expect to see those strong. So prices going up, yields coming down in response to people selling out of equities and moving into bonds, which are perceived as lower risk. We might expect riskier areas of credit to underperform government bonds. We're not seeing a lot of that going on in bond markets. And that's really because the main move that we have seen has been in energy prices. So oil thus far this week up around 20% and natural gas also spiking much higher. So energy markets really showing the main moves and that is leading to a lot of concern around inflation.

00:04:48:00 - 00:05:24:00
Jane Parry
OK. So just before we move on to inflation, what you're saying is that in a normal situation like this, if such things are normal, people would generally trade out of equities into safe haven assets because they are normally relatively safe compared to equities, relatively less risky, I suppose and provide capital preservation and protecting purchasing power. But given what's going on with inflation as a result of oil and gas, that's not what's happening in this situation.

00:05:24:00 - 00:06:16:00
Leah Bramwell
Yes, exactly. And I mean, look, every shock is different. And so in every shock, depending on what is driving that shock, the response, investor response will be different. So in this instance, investors are really responding at the moment to the uncertainty and their perception of what might happen in the future rather than actually anything fundamentally having changed at this point. Obviously in the Middle East, if you are living in the Middle East or if you have family in the Middle East, you've got a very real exposure. But at the moment, the global economy fundamentals haven't changed as a result of this. There's been disruption and tension in the Middle East for a long time. So this escalation is really an uncertainty and it's leading people to reassess what might be the impact going forward. That's still very unknown.

00:06:16:00 - 00:06:24:00
Jane Parry
So can we touch a bit more then on inflation because that seems to be what's worrying people the most in terms of the markets?

00:06:24:00 - 00:07:47:00
Leah Bramwell
Absolutely. So as we know, as we experienced in COVID and also again with the Russia-Ukraine war, increases in energy prices have a very direct impact on cost of living. And so, domestic fuel prices all around the world. So if we see significant increases in in oil prices, natural gas prices, that feeds very directly into inflation. And so we've had the experience of that inflationary shock in the relatively recent past, so people are very aware of that. And as a result of that increase in energy prices that we've seen, people are reassessing what the path for interest rates may be going forward. So in the US, prior to this week, there were three cuts expected priced into the markets, interest rate cuts, in the UK there were two. And after this movement in markets, there are now two cuts priced into the US and one cut priced into the UK. So that has been a driving force for bond markets. So we've seen significant increase in yields in the short and medium part of the curve for both treasuries and UK government bonds.

00:07:47:00 - 00:08:13:00
Jane Parry
So I think what you're saying is then, because the Middle East is central to global oil flows and actually natural gas in Qatar I think has halted some production as well, so that is restricting supply, increasing prices, and then that's going to push inflation higher, which just complicates central bank decisions and sort of acts like a bit of a tax on consumers and businesses, I guess.
 
00:08:13:00 - 00:09:13:00
Leah Bramwell
Yes, exactly. So it's inflationary. It also can impact growth. So higher energy costs can reduce profitability of companies, you know, so stagflation is the concern. So that is stagnant economic growth, higher inflation and that's what's really driving the concerns in markets at the moment. But I think it very likely actually that central banks look through shorter term changes in commodity prices like this. You know, this isn't a sort of structural change. This is a short period of volatility at the moment, that said it's difficult to see how this this comes to a very prompt diplomatic end. But at the moment I think we need to just remain pragmatic and look through to the long-term implications for client portfolios.

00:09:13:00 - 00:09:15:00
Jane Parry
Keep calm and carry on.

00:09:15:00 - 00:09:53:00
Leah Bramwell
Keep calm and carry on. And to be clear, markets have been relatively orderly. There's no panic obvious in markets. We've had a very strong start to the year. It's not at all surprising to see some of the gains that have been made in equity markets, in bond markets, in gold, to be given back a little bit in a period of uncertainty. So markets are still well up year to date. Some of these losses will be giving that back a little bit. There'll be some sort of taking money off the table going on. And I think we need to focus on the longer-term picture.

00:09:53:00 - 00:10:38:00
Jane Parry
Brilliant. Well, thank you very much. That's a good sum up as to where we are in the middle of the week anyway, I don't know where we'll be by the end of the week. These things seem to be moving around very, very quickly. So just to sum up what is in my Canaccord take away coffee cup today, as we all know, the geopolitical tensions in the Middle East have certainly added a new layer of volatility to global equity markets. But the biggest impact or concern at the moment seems to be inflation, driven by oil and gas prices. So keeping an eye out for what impact that has and the complexity of central bank decision making, I guess off the back of that, going forward. So thank you very much.

00:10:38:00 - 00:10:39:00
Leah Bramwell
My pleasure.

00:10:39:00 - 00:10:53:00
Jane Parry
Thank you for your time. I hope you've enjoyed the Canaccord Coffee Break podcast today. Don't forget to hit follow. Please do share your thoughts with us at coffeebreak@canaccord.com. Many thanks.

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

00:00:10:00 - 00:00:26:00
Tom Willis
Hello, and welcome to the Canaccord Coffee Break podcast. I'm Tom Willis, I'm stepping in for Jane Parry again as co-host to guide you through our usual deep dive into what's happening in the markets. Today, I'm joined again by Tom Hibbert, our Chief Investment Strategist.

00:00:26:00 - 00:00:27:00
Tom Hibbert
Morning, everyone.

00:00:27:00 - 00:00:29:00
Tom Willis
Morning, Tom. How are you?

00:00:29:00 - 00:00:45:00
Tom Hibbert
I'm not bad. I'm not bad. I'm going off to Guernsey this afternoon, I'm speaking at our annual conference on gold and currency debasement with Ned Naylor-Leyland from Jupiter. So I'm looking forward to that. And yeah, all is well. How are you?

00:00:45:00 - 00:00:54:00
Tom Willis
Yeah, good, thank you. Yeah, quite busy, not speaking on any conferences to do with gold, but I wish you well. Are you looking forward to that? Is that something that you enjoy talking about?

00:00:54:00 - 00:01:19:00
Tom Hibbert
I am, and we've spoken a bit about currency debasement and that's not what the podcast is about, so I don't want to get derailed immediately, but it's a topic that I think is particularly interesting at the moment, given the fiscal trajectories of the developed world and we're going into this new environment of fiscal expansion, which is quite interesting. Anyway, before we get too derailed, let's get into the podcast.

00:01:19:00 - 00:02:00:00
Tom Willis
Definitely. So our podcast each week is based on Tom's weekly markets review. We cut through the noise in a noisy industry, explain markets in simple terms and help you feel informed and confident. So hit follow on Spotify, Apple, your podcast platform of choice, so you never miss an episode. So, let's get into our episode this week. European and UK stocks hit new highs last week. Investors seem to be focusing on industrial, energy and material sectors, what we call the old economy sectors, we called that the old economy sectors last week. Why were these UK and European stocks doing so well last week, and has that trajectory been the same for a while?

00:02:00:00 - 00:03:52:00
Tom Hibbert
Yeah, as you say European and UK equity was pretty strong last year, but one of the key driving factors was that there was quite a lot of negativity priced into the markets. You know, everything has been for a while about US tech, mega cap tech in particular, we're now seeing this rotation under the bonnet and that's benefiting other markets, other sectors. And you know, the first point I'd highlight is just the starting valuations. So, the European equity market at the end of the year, after quite a solid year of performance last year, still trading at about 16 times forward earnings. That's the share price divided by the expected earnings per share for the next 12 months. That's relative to the US markets trading on about 22/23 times forward earnings and then the UK trading at about 14 times significantly cheaper. And you know, you also need to take into account earnings growth and stuff like that, but earnings coming out of Europe have been very solid. We saw some good earnings momentum there in Europe and the UK, within the UK, I'd highlight those. It's got a lot of weighting towards those old economy sectors, materials, for example, so benefiting from that. European tech still performing well year to date, which is highlight relative to US tech, which has been quite weak. And really, it's been software, enterprise software stocks that have been really terrible in the US and Europe. The European tech sector is a little bit more focused on sort of hardware rather than sort of software. And that has meant that it's been more insulated from this AI scare trade, the view that AI is coming for software stocks in particular. And European hardware and sort of semiconductor sectors tend to have been more insulated from that.

00:03:52:00 - 00:04:03:00
Tom Willis
Just a note on valuations as well. So, you mentioned 16 times, 22 times, is the valuation based on the price of the stock and the earnings?

00:04:03:00 - 00:04:07:00
Tom Hibbert
Yeah exactly, forward expected earnings per share.

00:04:07:00 - 00:04:11:00
Tom Willis
So essentially, the higher the number, the higher the projected earnings.

00:04:11:00 - 00:04:58:00
Tom Hibbert
No. So the higher the number, just the more expensive the valuation is. Often, it's because there's more earnings growth that's anticipated or you know, there are other factors that go into the valuation, but it's a pretty simplistic way of just looking at how expensive the market is. And the key point is the UK and European equity markets trading at quite a big discount to go to the US. Part of that is the sort of domestic economic picture in the UK and Europe, a little bit more uncertain than the US, which is growing at a better rate. Companies’ earnings in the US have been growing very solidly, but now this new AI fear factor has introduced a huge amount of uncertainty to the future of, particularly the US sort of software tech sector.

00:04:58:00 - 00:05:11:00
Tom Willis
And just on that economic backdrop as well, does the UK environment support this strong growth in the market in terms of expectations on inflation coming down and interest rates being cut?

00:05:11:00 - 00:06:11:00
Tom Hibbert
Yes, the UK definitely has a positive impulse from the increasingly dovish stance of the Bank of England. We've seen that a little bit with lower inflation, which we spoke about last week. Europe has, you know, inflation's already sort of at target and that doesn't look like there's a huge amount of inflation coming there. And there's this benefit as well from fiscal expansion coming particularly in Germany, and that's expected to support growth. But I would say the starting point for the European and UK economies has been a lot weaker. So, any positive surprise is quickly reflected into the markets, whereas in the US, the expectations are already for strong growth. So, you know, it takes more for a positive surprise in the US when the expectation is already is already quite high. So that’s been a key factor, I think, in driving some of the equity market performance.

00:06:11:00 - 00:06:26:00
Tom Willis
Another big story last week was the US Supreme Court blocking President Trump's global tariffs, ruling that he lacked the authority to impose them. In response, the White House has been exploring some alternative tariff measures. Can you touch on that, Tom, and the impact it's going to have?

00:06:26:00 - 00:07:37:00
Tom Hibbert
Yeah, of course and it's obviously difficult to say because the main thing that this has done is introduce uncertainty, maybe not in the global landscape, but more in the domestic landscape in the US. How is Trump going to implement his tariff trade policy going forwards? Where the US Supreme Court has struck down Trump's globals were sweeping tariffs, reciprocal tariffs, the tariffs that were designed to sort of punish China for fentanyl trafficking, drug trafficking, things like that. The Supreme Court blocked that, so all of those tariffs were implemented under the International Economic Emergency Powers Act and the US Supreme Court rules that he lacked the authority to impose them under that legislation. So, the White House is now exploring and has now implemented a blanket 10% global tariff and obviously there will be in developments there on how he will implement his trade policy going forwards. But this has been the most significant blow to trade policy and has introduced a little bit more uncertainty from a domestic standpoint rather than, I think, a global standpoint.

00:07:37:00 - 00:07:55:00
Tom Willis
I know we both have a keen interest in American history. So, I think we could probably go on for quite a while on that topic. But moving forward to the week ahead, I know it's, as you mentioned in the weekly markets review, it's a less busy macro calendar at the moment, but are there any things to look out for?

00:07:55:00 - 00:08:47:00
Tom Hibbert
So, we're in the midst of earnings season now, quite a long way through it. It's been another strong earning season. We've got some big results coming this week and videos due to reports. So that will be key, quiet on the economic data front, but we have had, you know, this return of the geopolitical risk premium with regards to US’s threats against Iran and, you know, pushing around towards any form of nuclear deal or negotiation. So, Trump is providing an ultimatum there. And obviously there's building a lot of military presence in the region, the biggest sort of military presence in the Middle East I think since the invasion of Iraq in 2003. So, we've seen oil prices spike in the last week. Brent's trading at about $70 a barrel and WTI at about $67 a barrel. So up sort of 6% last year.

00:08:47:00 - 00:08:51:00
Tom Willis
And they’re just types of oil that are used as a kind of measure of volatility.

00:08:51:00 - 00:09:28:00
Tom Hibbert
Yeah, just measures of, you know, Brent is more global and, and WTI is more US prices. So, a big spike in oil prices. And, and I suppose there's just a little bit of uncertainty with regards to that sort of geopolitical landscape and whether we see more volatility in the oil price, which has an impact on global growth as well. If you get another spike higher in oil, that obviously impacts the costs of businesses and can dampen growth. So, oil price volatility and geopolitics does have implications for global growth.

00:09:28:00 - 00:10:04:00
Tom Willis
OK, so if I sum up what is in my takeaway Canaccord coffee cup. UK and European stocks are doing quite well, fuelled by earnings and their relative valuations as investors rotate into old economy sectors. US trade worries ease slightly after the Supreme Court ruling, but Middle East tensions are still pushing oil prices high and volatility remains. So, markets seem to be broadening but risks clearly remain. Again, we would urge you, I think Tom, to diversify state balance and keep an eye on global twists as well.

00:10:04:00 - 00:10:05:00
Tom Hibbert
Yeah, absolutely.

00:10:05:00 - 00:10:18:00
Tom Willis
Fantastic, thank you for listening. Hit follow so you never miss an episode as I said, please do share your thoughts at coffeebreak@canaccord.com. And as always, stay invested, stay balanced, and stay on your toes. 

00:10:18:00 - 00:10:20:00
Tom Hibbert
Thanks for listening everyone.

00:10:20:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:00:35:00
Tom Willis
Hello, and welcome to the Canaccord Coffee Break Podcast. I'm Tom Willis. I work with our regular host, Jane Parry. Over the next two weeks, I'll be stepping in as co-host while Jane is away to guide you through our usual deep dive into what's happening in the markets. Today, I'm pleased to be joined by Tom Hibbert, Chief Investment Strategist in our Chief Investment Office.

00:00:35:00 - 00:00:39:00
Tom Hibbert
Hi, Tom, pleasure to have you on the podcast today. There’s a lot of Toms in the industry.

00:00:39:00 - 00:00:47:00
Tom Willis
There are a lot of Toms in the industry and particularly at Canaccord. So add it to the list.

00:00:47:00 - 00:00:47:00
Tom Hibbert
You know, it's your first time co-hosting the podcast. So yeah, as I say, pleasure to have you on. But we usually say at the start, to any new guests, what's your coffee preference?

00:00:58:00 - 00:01:10:00
Tom Willis
So, I do enjoy coffee. I'm not a coffee connoisseur, so normally, when I'm abroad, I might have a nice espresso, but when I'm in the office it's instant coffee, black, no milk and very, very strong.

00:01:10:00 - 00:01:16:00
Tom Hibbert
Fair enough. You know I quite like an instant coffee sometimes as well. There's nothing wrong with that.

00:01:16:00 - 00:01:17:00
Tom Willis
Bit of a guilty pleasure.

00:01:17:00 - 00:01:18:00
Tom Hibbert
Yeah, absolutely.

00:01:18:00 - 00:01:39:00
Tom Willis
So, each week our podcast is based on Tom's weekly markets review, and it's here to cut through the noise, explain markets in simple and clear terms, help you feel informed and confident. So hit follow on Spotify, Apple or your platform of choice so you never miss an episode. Welcome to this week's Canaccord Coffee break. Grab your coffee and let's start.

00:01:39:00 - 00:01:40:00
Tom Hibbert
Let's get into it.

00:01:40:00 - 00:02:02:00
Tom Willis
So last week on the podcast, we discussed whether AI was breaking the software business model. And this week feels like Part 2 to that story. The disruption narrative has seemed to move on from impacting software companies. Now financial services such as banks, insurance companies and wealth managers were suddenly in the firing line. So, Tom, what's triggered the shift in the disruption to these financial services companies?

00:02:02:00 - 00:03:27:00
Tom Hibbert
Yeah. So, I mean, if you look on the surface, last week global equity markets didn't move, but under the bonnet, you've got quite a serious rotation happening and you've asked what's triggered it. It's tended to be sort of new AI tools. So last week it was enterprise software. This week it's broadened out across sectors, but particularly concentrated within financial services. And the main trigger was the launch of new AI tools from Altruist and Insurify, which showed how AI could automate parts of the financial services industry. So, things like insurance, underwriting and research, tax planning and within wealth management, things like that. You know, and markets at the moment, they're very sensitive to AI disruption fears. We've got this AI scare trade people are calling at the moment. So, the mentality at the moment is shoot first, ask questions later. So, within financial services firms, you know, there's growing fears that AI could disrupt operating models and compress margins across the industry. And it's very similar to what we saw last week within software, markets are trying to figure out which industries, broadly speaking, will be threatened by AI. And at the moment it seems like it's, you know, a whole swathe of white-collar jobs that are no longer safe. And AI is getting better and better at an incredible rate.

00:03:27:00 - 00:03:37:00
Tom Willis
So, you mentioned that the AI threat was similar to how software has been threatened the previous week. How immediate do you think is this threat?

00:03:37:00 - 00:04:16:00
Tom Hibbert
You know, I think it's difficult to say really, because obviously this is a new technology and the innovation curve is very steep and AI tools are getting better and better all the time. I think I would say if you look through history, when you have new technology, it's tended to improve productivity and enhance the offerings of these companies rather than sort of destroy entire industries. So, I'm careful to be too pessimistic and I don't want to give a timeline, but it's difficult to say. But I think many of these businesses will be able to use and become more efficient on the back of enhanced tools effectively.

00:04:16:00 - 00:04:19:00
Tom Willis
By Thursday, the disruption seemed to broaden out.
 
00:04:19:00 - 00:05:14:00
Tom Hibbert
Yeah, yeah, it did. So the move spread to major banks, sort of midweek and the sell off within sort of growth sectors and financial services accelerated midweek. So, the global financial services sector ended the week down about 2 1/2%. In the US it was closer to a 5% fall. So, there was dispersion within the sector, but the key point is that it was a sort of thematic move. And as I say, you know it was a shoot first, ask questions later mentality. So, a broad sector wide sell-off. And as I said you, we often see this early in technological shifts, investors first price disruption aggressively and then over time they start to differentiate between companies that either adopt the technology and those that that fall behind. So, I expect winners and losers to emerge from what is at the moment a sector wide sell-off and sector wide scare.

00:05:14:00 - 00:05:28:00
Tom Willis
We mentioned about economic moats on the last podcast and the protections that companies have against disruption. Is that the case here? Do you think some of these financial services companies that have been impacted have good moats?

00:05:28:00 - 00:06:09:00
Tom Hibbert
Yeah, I do, I do. I think when it comes to things like wealth management, such a big part of that is about a human relationship. You know, a lot of these businesses already have significant scale. They've got really strong client relationships, regulatory infrastructure. I think AI can enhance productivity within those frameworks and people still value human decision making and client relationships. So I think there are economic moats here that will support the sort of future of a lot of these financial services firms, but obviously there is a lot of uncertainty around it at the moment. 

00:06:09:00 - 00:06:19:00
Tom Willis
And you mentioned there about winners in the AI story, and some of the winners over the past few years, such as NVIDIA, Apple, Microsoft, also came under pressure.

00:06:19:00 - 00:06:20:00
Tom Hibbert
Yeah, the Magnificent 7.

00:06:20:00 - 00:06:31:00
Tom Willis
The Magnificent 7 yeah. These stocks had a fantastic run in recent years, but is it fair to say that the excitement around them has fizzled out a bit? And why is that?

00:06:31:00 - 00:08:05:00
Tom Hibbert
Yeah, it is. And they're down year to date. So, the key question is around their capital expenditures, their investments. So, the Magnificent 7 projected to spend about $650 billion in 2026 across the largest tech firms. I think that's actually across the four largest tech firms and that's primarily going into infrastructure rather than sort of shiny new products. And that means data centres, AI chips, networking equipment, energy contracts. Investors are becoming cautious because this level of CapEx is massive relative to these companies’ free cash flow. It's absorbing their free cash flow effectively. And that raises questions about where they're going to get capital funding from. Are they going to have to tap the bond markets, which they're already doing to a large extent, and even whether companies sort of reduce their share buybacks, take on more debt, as I say, or just accept lower near-term profitability. And I think that's the key concern for investors. You know, there's a realisation that this is effectively a land grab, an AI arms race where companies want to capture as much market share as possible. If they have cash, they're going to spend it to try and capture that market share. There's not even an expectation that it's going to lead to profitability in the near term. And you know, obviously that's a risk. It's a strategy and people are questioning whether there are comparisons with excessive investment during the tech bubble or whether this really is a worthwhile endeavour for these businesses. 

00:08:05:00 - 00:08:19:00
Tom Willis
So, as the AI disruption impacts companies and they perform not as amazing as they have done, which parts of the market seem to benefit from these shocks, this disruption?

00:08:19:00
Tom Hibbert
Yeah, so all of this, it sounds pretty negative, but actual global equity markets were flat last week, and that is because investors weren't really selling equities, they were rotating within their equity portfolios. So you have a clear defensive rotation within equity markets, things like utilities up 5% last week, materials up 3%. And you did have, as I say people aren't selling equities, there's probably a slight downward bias within equity markets, so you've also got things like government bonds performing well, high quality investment grade credit outperforming more risky high yield credit. So, I think an aspect of this is, yes, there's a defensive shift, but it's not just a safe haven trade. It's also this shift towards what people refer to as the old economy. So those old economy sectors, things like materials, energy and utilities benefit directly from AI infrastructure build out. So, AI needs power, it needs materials, industrial capacity. So winners are sort of extending now beyond tech and as concerns are rising about tech. So we've got this quite aggressive rotation within equity markets and I suppose I would say the focus is on the old economy supply chain aspects of AI that are now doing well and that has been the trend for the year so far.

00:09:37:00 - 00:10:16:00
Tom Willis
Thank you, Tom. It's a pleasure to speak to you as always. If I can just sum up what's in my Canaccord take away coffee cup, markets are repricing the AI risk, software was disrupted last week, it's financial services this week. Even some of the biggest leaders in tech and AI have been questioned on their spending and returns. Money has been flowing to defensive and what we call the old economy sectors. So the theme, the AI narrative is going from pure buzzing excitement to scrutiny, and it makes me think that balance and diversification matter more than ever. If you agree, Tom.

00:10:16:00 - 00:10:20:00
Tom Hibbert
Yeah, totally. That’s bang on, Tom.

00:10:20:00 - 00:10:36:00
Tom Willis
Thank you. Thank you so much again Tom for joining me. It is a pleasure. Thanks for listening. Hit follow so you never miss an episode. Share your thoughts and feedback at coffeebreak@canaccord.com and as always, stay invested, stay balanced, and stay on your toes.

00:10:36:00 - 00:10:37:00
Tom Hibbert
Thanks for listening everyone.

00:10:37:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific personal entity. It is accurate at the time of recording and is subject to change.

00:00:10:00 - 00:01:00:00
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 Kamal Warraich, our Head of Funds Research. So as our regular listeners will know, this podcast is based on our weekly markets review. And each week we try to cut through the noise of what's going on in the markets, demystify it, and hopefully do that in a simple and easy to understand manner so you can feel more informed, more confident and more in control of your financial future. So, if you like what you're hearing, don't forget to follow us on Spotify or Apple or your other podcast channel of choice. And you will never miss an episode. So welcome, Kamal.

00:01:00:00 - 00:01:02:00
Kamal Warraich
Thank you for having me.

00:01:02:00 - 00:01:44:00
Jane Parry
Lovely to see you again, so grab your coffee and listen in. So, this week we are going to continue on the theme of market volatility. Last week we were talking about gold and silver, and this week we have moved on to the historic route in software stocks, where the whole of the software industry has suffered its worst week in the markets since April last year and its worst relative performance since the tech bubble burst 25 years ago. Now, Kamal, I am old enough to remember that because I've been around a long time. I'm sure you might not remember in real time yourself.

00:01:44:00 - 00:01:47:00
Kamal Warraich
No, not really. I wasn't around markets in those days.

00:01:47:00 - 00:01:50:00
Jane Parry
But you were on the earth.

00:01:50:00 - 00:01:50:00
Kamal Warraich
Oh, I certainly was.

00:01:50:00 - 00:02:23:00
Jane Parry
Great. So, this is off the back of AI related concerns and 300 billion US dollars was wiped off the market value of software firms in a single day in the last week. So, can we just get into that a little bit more? And can you help us understand what has triggered fears that AI will disrupt rather than enhance the software sector? And sort of building on from that, is this a genuine shift or is this another bout of overreaction by the markets?
 
00:02:23:00 - 00:02:45:00
Kamal Warraich
Yeah, great question. I think it's a bit of both. But if we if we go to the catalyst first, what actually caused the sell off, it was AI startup Anthropic’s release of their new tools. So these were designed to effectively automate work across different industries. We're talking legal and financial data services.

00:02:45:00 - 00:02:47:00
Jane Parry
OK, who owns Anthropic?

00:02:47:00 - 00:03:10:00
Kamal Warraich
Anthropic is a partnership from various companies. We know that Google, Alphabet have got an investment in Anthropic, for example. So there's various partnership funding that's gone into it, ultimately from the big companies in the world, if you want to call them the Magnificent 7, but various large entities such as Alphabet have invested significant sums into Anthropic.

00:03:10:00 - 00:03:20:00
Jane Parry
So Anthropic have designed new tools to automate workflows, so how does that seem to impact them in terms of what are the risks to those businesses then?

00:03:20:00 - 00:04:13:00
Kamal Warraich
So if we take the software bit, which is known as workflow, this is probably more simple to explain. So at the moment, if you have a financial services company that perhaps does something like accounting software, you would typically purchase their enterprise software, you would get it integrated into your small or medium sized business. You would plug into their database, and you would use their systems, their data and their software. AI is developing tools to effectively replicate what they do. So they'll be able to do it in a cheaper way, first and foremost. So they'll be able to scale up and they'll be able to mimic, potentially mimic some of the data sets that are used by the company to feed into that software as well. So AI will replicate what these companies are doing and potentially just take market share from them.

00:04:13:00 - 00:04:23:00
Jane Parry
Right. OK. So is that because those enterprise versions, their pricing model is based on a user per user or how does that work?

00:04:23:00 - 00:04:44:00
Kamal Warraich
So yeah, exactly that. So the enterprise software model is based on integrating specifically lots of proprietary systems into your business. It's expensive work. It costs a lot of money. Companies have to sign up to multi-year contracts. It's quite complicated and expensive business.

00:04:44:00 - 00:04:50:00
Jane Parry
OK. So you mentioned an economic moat. Can you just explain a little bit more about what that means?

00:04:50:00 - 00:05:26:00
Kamal Warraich
So in traditional finance terms, an economic moat, if you think of it like what a moat actually is, it's that water around a castle. An economic moat is something that protects a company from getting disrupted from its competitors, something you can hang your hat on. The most established economic moat in literature is typically brands, for example. So brands give companies a very strong economic moat. It's one example of a moat, but a brand is a very good one. They tend to have longevity. It's very hard to pull customers away from brands that would be considered a –

00:05:26:00 - 00:05:29:00
Jane Parry
So something like Coca-Cola, for example.

00:05:29:00 - 00:05:30:00
Kamal Warraich
For example, Coca-Cola.

00:05:30:00 - 00:05:41:00
Jane Parry
So what moats exist then in terms of these specialist software businesses, and how could that potentially help them defend themselves against this AI threat?

00:05:41:00 - 00:06:16:00
Kamal Warraich
So the most important moat that they have which the market has, you know, been very sure on until recently was their data sets. So if you take a legal company that does data analytics on previous cases on precedent set by the court, these are proprietary data sets that the company has acquired over its lifetime, maybe decades, maybe even 50 or 60 plus years. And that data cannot easily be required or replicated by other individuals or companies.

00:06:16:00
Jane Parry
OK, I get it. So if you're a user of that software and that data from that company, you're interrogating that data.

00:06:24:00 - 00:06:25:00
Kamal Warraich
Yes.

00:06:25:00 - 00:06:33:00
Jane Parry
So the threat is that AI could do that job because it will pull that same data from the World Wide Web or all different sources I guess.

00:06:33:00 - 00:07:15:00
Kamal Warraich
So exactly right. And that's where the protections come into play and the quality of data. So at the moment, whilst these data companies are very restrictive on who can actually access that data and there's lots of measures in place to protect that data, technically AI could replicate that data by mining it, harvesting it off the web. You could actually purchase that data and integrate it into your AI software. So we know that some of those companies do sell their data to external parties. So it is about monitoring how that data is being used and at what price it's being sold at and some of the maybe the protections around them from the regulator, for example.

00:07:15:00 - 00:07:20:00
Jane Parry
So a regulator could offer protection as well. How does that work?

00:07:20:00 - 00:08:06:00
Kamal Warraich
So, we've seen some cases of this where data companies have taken certain end users to court because they've broken contracts, they've overharvested data from databases and tried to replicate the database themselves. And that that has happened. So the court provides protection around proprietary data. So you would need the regulator to put a seal over this, perhaps specify that data set should be protected and quality assurances should be applied as well. So, for example, if you have a court case and you're a lawyer, you can only use data from these verified sources. You cannot use AI or for example there might be those tools available for these companies.

00:08:06:00 - 00:08:21:00
Jane Parry
Interesting, interesting times that we live in again. So, have you got anything else to add about how this might impact, you know, because we're here about investing, aren't we in wealth management, how might this impact portfolios going forward?

00:08:21:00 - 00:08:30:00
Kamal Warraich
I think the most important message is to not panic. The market usually shoots first and asks questions later.

00:08:30:00 - 00:08:32:00
Jane Parry
Yes, always.

00:08:32:00 - 00:09:08:00
Kamal Warraich
Very, very typical of stock markets. And some of these companies will not only survive, but they will thrive in a new world. They will utilise AI in in a way that benefits their business. You know, we can't tell you today who exactly they might be, but you know, we would say that certain moats, like data, could well be protected and for certain companies maintain a competitive advantage. So we would tell people again, reiterate not to panic. We think you should have exposure to some of these companies and some will do better than others. Time will tell.

00:09:08:00 - 00:09:15:00
Jane Parry
So I guess and stock selection is critical going forward analysing who's leveraging AI to their benefit.

00:09:15:00 - 00:09:16:00
Kamal Warraich
Absolutely.

00:09:16:00 - 00:09:17:00
Jane Parry
And who's been threatened by it

00:09:17:00 - 00:09:19:00
Kamal Warraich
That's right.

00:09:19:00 - 00:09:52:00
Jane Parry
So, perhaps time to sum up what's in my Canaccord take away coffee cup today. So, what's happened this week is AI stocks seem to be coming for software stocks, and they've had their worst relative performance since the tech bubble. And this is all on fears that AI developments could bypass traditional software companies altogether, either their data or their interface. But this seems to be fairly indiscriminate across the whole sector at the moment. So again, taking a bit of a watching brief, keeping an eye out for careful stock selection going forward. So anything else to add to that?

00:09:52:00 - 00:09:56:00
Kamal Warraich
No, I think you've summarised that very well.

00:09:56:00 - 00:10:15:00
Jane Parry
Thank you. So thank you very much indeed for your time today. I hope you enjoyed the Canaccord Coffee Break podcast and you learned a little bit about AI and software. Don't forget to hit follow so you never miss an episode. And please do share your thoughts with us, coffeebreak@canaccord.com. Many thanks.

00:10:15:00
Speaker 3
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. It is accurate at the time of recording and is subject to change.

If you require an older transcript, please get in touch coffeebreak@canaccord.com.