Our weekly investing podcast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

00:12:00:00
Speaker 3
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.

00:00:11:07 - 00:00:23:22

Jane Parry

Good morning and welcome to the Canaccord Coffee Break podcast. I am Jane Parry, the Chief Marketing Officer here at Canaccord Wealth, and I am delighted again to be joined by Tom Hibbert, our Chief Investment Strategist.

00:00:23:23 - 00:00:25:03

Tom Hibbert

Welcome back from holiday.

00:00:25:04 - 00:00:33:05

Jane Parry

Thank you. Yeah, it's good to be here. And I'm very pleased to say that Tom has got his England cufflinks in today. Ready for the match later on this week, so.

00:00:33:05 - 00:00:35:19

Tom Hibbert

I don't watch the football but I support it.

00:00:35:19 - 00:01:01:11

Jane Parry

But I do. And so good luck to England, that's why I say. Okay, so this week we are not trying to demystify what's going on in the World Cup. We are indeed trying to look at what's going on in the markets and then hopefully you can feel more informed, confident and in control of your financial future. So the last week, Tom, it seems to have been a bit of a bumpy ride for equities, particularly in tech.

00:01:01:13 - 00:01:03:04

Tom Hibbert

We're talking about ‘ants’ today.

00:01:03:06 - 00:01:21:14

Jane Parry

Ants, we are talking about ants. Yeah, I didn't know what ants were, well I knew what ants were, not ants in context of investing before today. But the market fundamentals still looks strong but starts, parts of the market are starting to behave differently, which is where the ants come in.

00:01:21:15 - 00:01:26:19

Tom Hibbert

Yeah, look a bit frothy. We've spoken about this before. There’s areas of froth.

00:01:27:00 - 00:01:33:23

Jane Parry

And I think generally things have been driven by genuine earnings growth. But we are looking at the froth and why that is happening.

00:01:34:00 - 00:01:36:20

Tom Hibbert

The clearest example is Korea.

00:01:36:21 - 00:01:38:00

Jane Parry

Korea, South Korea.

00:01:38:01 - 00:01:38:19

Tom Hibbert

Exactly.

00:01:38:20 - 00:01:55:11

Jane Parry

Okay, so let's get into that in a little bit more detail. Has everybody got their coffee? Let's dive on in and see what is going on. So you mentioned South Korea. Where retail investors are known as ants. So go on, why is this and what does it mean?

00:01:55:12 - 00:02:18:22

Tom Hibbert

I think it's because they behave a little bit like ants, as do retail investors everywhere. But it's the term in Korea that they use to describe South Korean retail traders. It's a country where it's retail trading is a huge part of the culture that has just expanded massively in recent months. There are over 14 million individual investors.

00:02:18:23 - 00:02:27:23

Tom Hibbert

Yeah. So it now represents about a third of the country's daily stock trading volume. And they are significantly influencing the market.

00:02:27:23 - 00:02:35:18

Jane Parry

So they sort of all act collectively, which is why they're called ants.

Tom Hibbert 

Exactly.

Yeah, okay. Yeah. So what have they recently swarmed into then.

00:02:35:19 - 00:03:04:01

Tom Hibbert

Well, they have, like everywhere else, they're buying into the tech, an AI rally. And they have, there are two companies in South Korea that manufacture semiconductors, semiconductor manufacturing chips, Samsung and SK Hynix. And they in particular have become a huge influence in the Korean stock market and are very popular with those retail traders.

00:03:04:02 - 00:03:04:18

Jane Parry

Okay.

00:03:04:19 - 00:03:14:09

Tom Hibbert

So to put that into perspective. SK Hynix shares have surged over 1,700% in just over a year.

00:03:14:10 - 00:03:14:18

Jane Parry

Wow, okay.

00:03:14:19 - 00:03:17:24

Tom Hibbert

Samsung’s are up about 600%.

00:03:17:24 - 00:03:18:12

Jane Parry

Huge, both of them then.

00:03:18:12 - 00:03:34:04

Tom Hibbert

Massive, massive takes, extraordinary level of concentration now as well, because they've grown so much that they now make up over three quarters of the Korean market. The Korean equity index.

00:03:34:05 - 00:03:38:06

Jane Parry

Two companies making up three quarters of the stock market. That's a bit bonkers,

00:03:38:08 - 00:03:39:01

Tom Hibbert

Exactly.

00:03:39:02 - 00:03:44:05

Jane Parry

Extraordinary level of concentration. I'm guessing, therefore, is that risky?

00:03:44:09 - 00:04:02:07

Tom Hibbert

Yeah. It's risky, and it's risky because retail investors are, they're not just buying the companies, they are almost treating it like gambling. So one of the ways that has in the last couple of months, the Korean watchdog has approved the use of leveraged ETFs. Which gives…

00:04:02:09 - 00:04:03:20

Jane Parry

Whoa, whoa, whoa.

00:04:03:22 - 00:04:05:00

Tom Hibbert

Well I'll explain.

00:04:05:02 - 00:04:05:06

Jane Parry

Go on.

00:04:05:07 - 00:04:27:15

Tom Hibbert

Yeah. Yeah. So leveraged ETF is just you can, instead of buying the shares in the company, you buy an exchange traded fund an ETF. That gives you exposure to the company. It's a single stock ETF. So it just gives you exposure to that company but with two times leverage. So if the stock price is up 10% on a single day you would get twice that return.

00:04:27:16 - 00:04:33:01

Jane Parry

Right.

Tom Hibbert

Make 20%. If the share price falls 20%, you would lose 40%.

00:04:33:03 - 00:04:33:14

Jane Parry

Wow, okay.

00:04:33:15 - 00:04:40:10

Tom Hibbert

So basically the ETFs that borrow and then buy twice as much are twice as sensitive to the share price.

00:04:40:11 - 00:04:41:19

Jane Parry

So really turning up the volume.

00:04:41:20 - 00:04:50:21

Tom Hibbert

Really turning up the volume. And these leveraged ETFs have become incredibly popular and it's influencing the market now, it's creating a lot of volatility.

00:04:50:21 - 00:04:58:11

Jane Parry

And so for example the SK Hynix leveraged ETF. What, how much is in that?

00:04:58:12 - 00:05:31:02

Tom Hibbert

It swelled to $10 billion. And we've seen at the end of May another 16 similar single stock products linked to chipmakers were launched in Korea. So there's a massive swelling popularity within these ants in Korea towards these products. But this month, because we've obviously seen weakness within global technology stocks, that has caused some of the liquidity to break down in these products.

00:05:31:03 - 00:06:21:00

Tom Hibbert

So you have big divergences between the product performance within the ETFs and the actual underlying stock return. So you've had, and also just the other thing that its created is massive volatility in the Korean stock market. So you see daily moves plus or -10% for some of these two companies for SK Hynix and Samsung, but also for the index as a whole because they make up, you know, three quarters of the index.

So the Korean stock market has gone a bit haywire. On Friday last week we've seen, because we've got this June swoon at the moment, Hynix stock fell 17% in a little over a trading session mid-week last week. And then on Friday it was falling sharply again. The Korean Stock Exchange fell 9% shortly after the open, and then they had to halt trading on the Korean Stock Exchange.

00:06:21:01 - 00:06:22:08

Jane Parry

Okay, so pretty serious.

00:06:22:08 - 00:06:25:09

Tom Hibbert

Pretty serious, frenzy and a lot of froth.

00:06:25:12 - 00:06:27:00

Jane Parry

An ant frenzy.

00:06:27:01 - 00:06:27:16

Tom Hibbert

Exactly.

00:06:27:17 - 00:06:36:11

Jane Parry

Okay. Is this an early warning sign for broader global markets or just sort of a pocket of local excess, I guess?

00:06:36:13 - 00:06:40:21

Tom Hibbert

Yeah. There are pockets of excess in other areas as well.

00:06:40:22 - 00:06:43:20

Jane Parry

But it's amplified here because of the structure.

00:06:43:21 - 00:07:07:02

Tom Hibbert

Because of the structure, exactly. And look, I mean, I think if you zoom out and you say there are specific problems there. But we are amidst a lot of exuberance around technology that is now, you know, that that has come off the ball a little bit in June, this June, swoon. And that's driven by two fears. One we spoke about last week, the increased fears around US inflation and….

00:07:07:04 - 00:07:09:08

Jane Parry

Yeah we talked about the US economy running a bit hot.

00:07:09:10 - 00:07:31:21

Tom Hibbert

Exactly. And we have seen Tim Cook come out and say that he's hiked prices at Apple. Microsoft followed suit last week. So we're seeing more evidence of, you know, that's driven by the crazy demand for Dram for memory. And it's more evidence that the AI buildout is putting upward pressure on prices, creating inflation intention.

00:07:31:22 - 00:07:36:07

Jane Parry

And that's primarily in the US. But I guess can be can spread.

00:07:36:08 - 00:07:40:03

Tom Hibbert

Yeah. And it's unsettling the tech rally globally.

00:07:40:07 - 00:07:42:13

Jane Parry

Yeah. So what's the other reason for the June swoon.

00:07:42:14 - 00:08:02:01

Tom Hibbert

The other is simply positioning. Once you've, if you've had really strong equity market performance it's very reasonable for you know, positioning becomes stretched. It's reasonable for there to be a little bit of a period, of a reset and a normalization. And I think actually that is healthy. And for some of that froth to come out of the market and it makes the rally more sustainable.

00:08:02:01 - 00:08:31:06

Tom Hibbert

And investors are now sitting back and saying, okay, we've had a period of seriously strong performance and now there's a little bit of weakness. Let's reset and let's look at what's happening within the tech sector and within AI. And that I think, there's now this recognition or more of an obvious realization that the AI cycle hinges on one specific thing, which is end user demand.

00:08:31:15 - 00:08:31:18

Jane Parry

Yeah.

00:08:31:19 - 00:08:32:15

So using the large company and all of the other, you know, companies that might use them and the revenue forecasts that companies like anthropic and OpenAI have made because they've made huge commitments to buy compute from the hyperscalers.

00:08:48:11 - 00:08:54:03

Jane Parry

Okay. By compute from the hyperscalers, I saw that in the weekly markets review, and I needed you to explain it to me.

00:08:54:05 - 00:09:01:07

Tom Hibbert

Yeah, sure. So AI services use a huge amount of compute and they buy that compute…

00:09:01:09 - 00:09:05:16

Jane Parry

Compute, meaning the processing power behind AI infrastructure.

00:09:05:18 - 00:09:46:11

Tom Hibbert

Exactly. And the computers being built out by the hyperscalers, which are building huge data centers, massive mega cap technology companies. Like Microsoft, Amazon building data centers, data center build out that rely on the revenue of AI companies to buy that compute off them. And the AI companies have huge commitments to buy compute off the hyperscalers, the hyperscalers are investing huge amounts in the AI infrastructure. But it all relies, it all depends on the AI companies revenue for being able to generate the revenue that they think they'll be able to generate.

00:09:46:11 - 00:09:47:14

Jane Parry

From the end users.

00:09:47:14 - 00:10:04:10

Tom Hibbert

From the end users. And that means that, are they going to be able to charge their customers what they think they're going to be able to charge them? And the whole AI cycle falls apart if those revenue forecasts are wrong.

00:10:04:11 - 00:10:04:17

Jane Parry

Yeah, okay.

00:10:04:18 - 00:10:32:03

Tom Hibbert

And we've had a look at the forecast that they're making. And they're not unrealistic. They're optimistic but they're not necessarily unrealistic. But it does fundamentally all hinge on this being true. And it's why I think, you know, if you have a cheaper AI like DeepSeek in China that can undercut the developed market, the Anthropic and OpenAI, those revenue forecasts could quite easily come under pressure.

00:10:32:04 - 00:10:32:14

Jane Parry

Okay.

00:10:32:15 - 00:10:51:03

Tom Hibbert

And that's why I don't think the DeepSeek question has been fully answered. I also think it's why the next wave of the AI buildout might be focused on the efficiency of compute. If you bring the cost of compute down, then the mathematics for the whole AI cycle becomes much, much easier to…

00:10:51:05 - 00:11:11:02

Jane Parry

It's that whole ecosystem that's so fully interlinked, isn't it? And I guess if demand disappoints, you know, if end users are not prepared to pay for the AI or sufficiently pay the price that they're looking for, then that's going to ripple all the way through that entire chain. Yeah, okay. We've covered a lot then today, ants and AI.

00:11:11:08 - 00:11:35:09

Jane Parry

So let's have a little look what's in my Canaccord takeaway coffee cup. We've talked about the whole AI ecosystem, from AI companies to cloud providers to chipmakers. And we discussed that if end user demand disappoints, then that ripple does go all the way through and hence probably why we're seeing a little bit of froth taken off the top is some of that reality check comes in.

00:11:35:10 - 00:11:35:20

Tom Hibbert

I think so.

00:11:35:20 - 00:11:59:08

Jane Parry

I was interested to hear what's going on in South Korea. Did not know anything about that market at all, but obviously I've heard of Samsung before, but two massive chip manufacturers are representing kind of a localized market issue there, but maybe indicative of some other areas just of volatility. And as we've said before, we think AI remains a powerful long-term trend.

00:11:59:09 - 00:12:12:18

Jane Parry

But when enthusiasm rather like the Korean ants runs ahead of reality, then markets do pause, reset, refocus on the fundamentals. I'm in a reminder that even strong markets, they don't move in straight lines.

00:12:12:19 - 00:12:13:21

Tom Hibbert

That's exactly right.

00:12:13:22 - 00:12:32:13

Jane Parry

Like ants. So thank you very much. Thanks for listening to the coffee break today. Hope you've enjoyed it. Don't forget to hit follow on your preferred podcast channel of choice, and you will never miss an episode. And as ever, we'd love to hear your thoughts. And the email is coffeebreak@canaccord.com do drop us a line. Many thanks.

00:12:32:13 - 00:12:34:05

Tom Hibbert

Thanks very much for listening.

00:12:34:07 - 00:12:56:02

Speaker 3

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

00:00:10:00 - 00:00:25:00
Tom Willis
Hello and welcome to the Canaccord Coffee Break Podcast. I'm Tom Willis. I am filling in for Jane Parry while she's away.  I'm joined today by Tom Hibbert, who's our Chief Investment Strategist in our Chief Investment Office. How are you, Tom?

00:00:25:00 - 00:00:33:00
Tom Hibbert
I'm very well thanks, Tom. It's good to be here, sat with you. It's a pleasure to be with Jane, but yeah, good to have a Tom-on-Tom conversation today.

00:00:33:00 - 00:01:18:00
Tom Willis
Brilliant. It's my pleasure. So each week our podcast tries to cut through the noise, demystify what's happening in the market and help you feel more informed, confident and in control of your financial future. So, Tom, this week, it's been a week of political change in the UK. Keir Starmer's resigned as UK Prime Minister and leader of the Labour Party. It's added a little bit of uncertainty at home. But we think the biggest story for markets in terms of the lasting impact is coming from the US. There's been a shift in tone at the US Federal Reserve with a new chair, Kevin Warsh, already resetting expectations. So you're here to tell us about where markets go next. So grab your coffee Tom and let's chat. And you can help us decode what's going on.

00:01:18:00 - 00:01:19:00
Tom Hibbert
Absolutely.

00:01:19:00 - 00:01:39:00
Tom Willis
So let's start at home. It would be remiss not to mention Starmer's exit. Markets have seemed relatively calm. But like we said, it does introduce some uncertainty into what is quite a sensitive backdrop in the UK. So where is the uncertainty most likely to be felt in terms of immediately with Starmer's exit and the incoming Prime Minister, which we think is probably going to be Andy Burnham?

00:01:39:00 - 00:03:05:00
Tom Hibbert
It wouldn't be a surprise, I think to most listeners that the gilt market is where the vulnerability is. You know, everyone's familiar with the Liz Truss episode and the pressures that the gilt market has faced in recent months as well. You know, Andy Burnham, the king in the North, he's described, he's seen as someone who could easily want to oversee a further fiscal expansion in the UK. The gilt market will be very sensitive to that. It's sensitive to the borrowing rules, which the UK has built as a rod for its own back in that respect. But there are bond vigilantes operating in the UK bond market that are very sensitive to these changes. It's also a very technical market. So, you know, there are a lot of tourists, speculators in the gilt market, hedge funds, momentum traders, that sort of thing that creates leverage and volatility that ultimately does make the UK bond market quite vulnerable to UK politics. And you know, UK politics is volatile in itself. So there is a political risk premium on gilts that I think is valid at the moment. And Andy Burnham I think adds to some of that vulnerability with respects to his sort of Manchesterism, I've seen it described as, which you know, could be related to a more fiscal looseness, let's say.

00:03:05:00 - 00:03:39:00
Tom Willis
For listeners at home, when we refer to gills, we mean UK government bond. So as Tom said, we think that's where the impact will be felt with his political change. So turning to the US, as mentioned, we have a new chair of the Federal Reserve in Kevin Warsh and his feet first meeting already felt a little bit different. And you're here Tom to explain the kind of changes that he's introduced so far and what it means going forward. So first do you want to talk about the kind of immediate impact on the current interest rate cycle you think that will have?

00:03:39:00 - 00:04:57:00
Tom Hibbert
Yes, absolutely. And, you know, he took no time in immediately asserting himself, which I think wasn't actually really a surprise. There's been a lot of market chatter about his independence. Is he a puppet of the US administration? And he's proven himself not to be already in the first meeting. President Trump has put a lot of pressure on the Fed to cut rates, his choice. And Fed Chair Kevin Walsh is not putting through interest rate cuts. In fact, we've seen quite a stark shift. Hawkish shift at the Fed from across the committee. Obviously the Federal Reserve is a committee, but Kevin Warsh as well, you know, he has delivered quite a blunt commitment to inflation control at this meeting. He's what I would describe as a price stability pragmatist. And he does see upside risks to inflation. So the Fed in this meeting has abandoned their easing bias. They're now saying, look, we're not looking at cutting rates. I think the FOMC, the committee that decides interest rate policy, is now tilting in a more hawkish direction. You can see that on the dot plot, which is their sort of expectation of future interest rates. Most of them see interest rates rising this year and next now.

00:04:57:00 - 00:05:10:00
Tom Willis
And you know, when we talk about the Fed, it seems as if we do talk in binary terms of them being hawkish or dovish in terms of focusing on interest rate cuts or interest rate.

00:05:10:00 - 00:05:14:00
Tom Hibbert
Or hawk in dove's clothing is what people have been saying about Kevin Warsh.

00:05:14:00 - 00:05:32:00
Tom Willis
But like you said, he seems to be more of a pragmatist than making the right decision at the right time. And what do you think then moving forward from the current cycle, what do you think his long-term impact on policy is and the kind of philosophy of the Fed and what they're going to do in the future essentially, which is probably what investors want to know.

00:05:32:00 - 00:06:07:00
Tom Hibbert
Yeah, he's a fascinating chap. And I've always thought actually that that he was a good choice for Fed chair. And he's not just a sort of price stability pragmatist, which is the term that I use, but he also has a very strong institutional reform agenda. He's looking at reforming the Fed and he brings some self-reflection to the Fed, which I think is needed actually, whether that's with regards to the Fed's excessive use of liquidity policy. He resigned in 2011, you know, over concerns about the central bank's use of quantitative easing.

00:06:07:00 - 00:06:09:00
Tom Willis
But by which we mean?

00:06:09:00 - 00:08:24:00
Tom Hibbert
Buying government bonds, injecting liquidity into the market, it's a form of very strong stimulus, which is, you know, previously was reserved for periods of extreme volatility to stabilise the market. Well, for a lot of  the last 15 years, the Fed has used that policy not to stabilise the market, but to steer the economy. And he's been a very strong critic of that. I think, you know, we can go down that route, but I think he will struggle to bring that under control. But I think what's actually really more interesting, putting that to one side for one moment, is his view of forward guidance. So the Federal Reserve historically has provided, you know, particularly under Powell a lot of guidance in terms of what are they seeing in the economy, what are they seeing from an inflation perspective, what are they seeing from a growth perspective? And then they've guided the market to what they should expect from the Fed and that kind of creates a little bit of a feedback loop. Because the Fed is reading the market and seeing and then telling the market what their interpretation is, what they should be doing. And the market at the same time is reading the Fed and it creates this feedback loop. So Warsh is cutting down and refining the messaging from the Fed and not giving them much to go on what on what to expect going forwards. So, for example, the policy statement this meeting that the wording that comes around that the interest rate decision was cut from 300 words to 130. And he also talked about the dot plot, which is the policy member’s, their own expectations of where interest rates should be over the short to medium term. He abstained or refrained from entering his own dot to the dot plot. So he is a critic of forward guidance. Expect a lot less clarity on what to expect from the Fed. It means it gives them greater flexibility to react to changes in the economy. And you know, I think forward guidance can be a bit of a rod for the Fed’s back and you know, that's one significant change, stripped down messaging.

00:08:24:00 - 00:08:39:00
Tom Willis
And then just finally moving on to inflation, as you know, we've got the USPCE inflation data coming this week. What should investors be watching out for? What kind of impact does that have?

00:08:39:00 - 00:09:24:00
Tom Hibbert
Yeah, inflation is, so the US core PCE is the main gauge that the Fed uses that's expected to accelerate a little bit, core inflation still quite sticky. Inflation in general is still quite sticky. I'd expect the data this week to sort of affirm the Feds hawkish pivot in this last week. And that's something that we'll certainly be watching quite closely. But you know, in terms of what we expect from the Fed going forwards, I think it's unlikely that they're going to, you know, that they're going to be able to cut rates. Now the expectation is certainly for rate hikes.

00:09:24:00 - 00:09:46:00
Tom Willis
OK. To sum up what is in my takeaway coffee cup this week, this was very much a week about reset. So in the UK there was more political uncertainty and in the US there’s a clearer, more disciplined Fed, which is focused on inflation. I think, Tom, you will agree that the key message is that markets may have to rely less on central banks, or guidance from central banks and more on underlying fundamentals.

00:09:46:00 - 00:10:13:00
Tom Hibbert
Yeah, the Feds in particular, because they're not going to provide that forward guidance to the market in the same way that they have done before. And they say that, you know, that kind of makes a rod for their own back because then if they have to change their views, it can impact the market, it can detriment the market. So they want to be more flexible given the fluidity of the current situation, but also Warsh is a critic of forward guidance in general.

00:10:13:00 - 00:10:37:00
Tom Willis
Well, thanks for joining me today, Tom. I know this is a topic of particular interest for you and, and you speak about it very well. So thank you for explaining everything there. And thank you to everyone for listening to the Canaccord Coffee Break podcast. If you've enjoyed it, please don't forget to hit follow where you listen to your podcasts and you'll never miss an episode. As always, we'd always love to hear your thoughts. You can e-mail us at coffeebreak@canaccord.com.

00:10:37:00 - 00:10:39:00
Tom Hibbert 
Thank you very much. 

00:10:39:00
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.

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

00:00:22:00 - 00:00:23:00
Tom Hibbert
Good to see you, Jane.

00:00:23:00 - 00:00:24:00
Jane Parry
Morning, morning.

00:00:24:00 - 00:00:25:00
Tom Hibbert
Pleasure to be back.

00:00:25:00 - 00:00:40:00
Jane Parry
So, as you know, each week the podcast tries to cut through all the noise and demystify what's going on in the markets and hopefully help you feel more informed, confident and in control of your financial future. So this week, busy week.

00:00:40:00 - 00:00:41:00
Tom Hibbert
Absolutely.

00:00:41:00 - 00:01:17:00
Jane Parry
Busy week, lots going on that we want to talk about and something different to talk about actually. So, markets found fresh momentum at the end of last week with one event standing out in particular, and that was SpaceX’s blockbuster of a debut. It wasn't just a big IPO or initial public offering. It was a massive one, but it was also a real test of how much risk appetite there is out there for the public markets. Plus, add into that hopes of the Middle East de-escalating and a rate rise from the ECB in Europe.

00:01:17:00 - 00:01:20:00
Tom Hibbert
That's right.

00:01:20:00 - 00:01:40:00
Jane Parry
So, all of a sudden, the market mood looks very different. So, let's dive on in and grab your coffee and let's see what's going on. You can hopefully explain all that to us. So let's start with the obvious one. Why does this massive SpaceX IPO matter so much for the wider market? What's going on there?

00:01:40:00 - 00:01:56:00
Tom Hibbert
Yeah. I mean, it's the largest IPO in history, so obviously that matters. Yeah, I would say just, you know, we're meant to approach this podcast on a macro level. We talk about the big things that are affecting global financial markets. I'm not really supposed to talk about individual companies.

00:01:56:00 - 00:01:58:00
Jane Parry
No, okay.

00:01:58:00 - 00:02:39:00
Tom Hibbert
But some weeks with an individual company, the micro becomes the macro. And last week that was definitely the case. I mean, the largest IPO in history, SpaceX, is a massive company. There's a huge amount of focus on tech and right at the frontier of technology and innovation. And SpaceX captures a lot of that. So it's obviously a macro event at a vast level. It's hugely important for equity markets. So SpaceX listed in the US raising $75 billion, a valuation of $1.8 trillion.

00:02:39:00 - 00:02:42:00
Jane Parry
That's huge, isn't it? That's bigger than most countries.

00:02:42:00 - 00:03:05:00
Tom Hibbert
Yeah, and Elon Musk is now a trillionaire, he's the first trillionaire. And yeah, it went off without a hitch. And what's important for us, you know, is, because we don't give a recommendation on SpaceX as a company, we want to talk about what are the macro implications -

00:03:05:00 - 00:03:06:00
Jane Parry
What it means.

00:03:06:00 - 00:03:10:00
Tom Hibbert
What it means. And you know it was a -

00:03:10:00 - 00:03:14:00
Jane Parry
So this is just basically much bigger than one company, one stock?

00:03:14:00 - 00:03:37:00
Tom Hibbert
Yeah, exactly. And the whole market shifted in terms of, you know, risk appetite. June so far has been quite weak. We had a monster rally in April and May, June, a bit of weakness for the month and then around the sort of SpaceX IPO, quite a lot of reversal in in risk appetite. We saw equities start to perform very well.
 
00:03:37:00 - 00:03:39:00
Jane Parry
What sort of people are investing in SpaceX then?

00:03:39:00 - 00:04:16:00
Tom Hibbert
There's a lot of retail participation, which we didn't really see in previous, in tech cycles like this. You didn't see that in the late 90s to the same extent. But it's not just retail investors as well. We’ve got SpaceX entering into indices over the next few weeks and months. So we'll see some institutional buying and passive buying of SpaceX via that. We've seen even some sovereign wealth funds get involved in the early days. So Gulf sovereign wealth fund has been buying. So it's quite broad, but I would highlight in particular broad participation, but I'd highlight retail participation as well.

00:04:16:00 - 00:04:22:00
Jane Parry
So does this mark sort of a genuine reopening of public equity markets for big growth businesses?

00:04:22:00 - 00:04:46:00
Tom Hibbert
Yeah, it's a good point to raise because in this cycle, we've seen a lot of big companies, big tech companies, big AI companies that have grown a lot and providing that sort of new frontier technology, they've stayed private for longer. And now we're starting to see some of them come to market, and SpaceX is an example of that. All of the big ones in the pipeline are an example of that.

00:04:46:00 - 00:04:52:00
Jane Parry
So why have they stayed private for longer then? So you mentioned Anthropic and they're all private at the moment.

00:04:52:00 - 00:05:31:00
Tom Hibbert
Yeah, so the market has shifted more. There's been a growth in private capital. And there are some reasons why companies might want to do that. They don't necessarily need to go to public markets to raise money as early as they have done historically. But what we've seen, and what we see in the in the pipeline, is actually we are seeing more companies becoming public and listing and that gives you sort of an additional layer of price discovery and it gives you a better insight into those companies and their valuations.

00:05:31:00 - 00:05:37:00
Jane Parry
Interesting. Because this SpaceX one has gone so well, that's probably setting an encouraging tone for future.

00:05:37:00 - 00:05:48:00
Tom Hibbert
Yeah, early days, but yes, so far it's going well. It's being well digested by the market. And, you know, there's still a lot of excitement around tech.

00:05:48:00 - 00:06:01:00
Jane Parry
Okay, thank you. Let's talk about the US Iran deal and potentially the hopeful reopening of the Strait of Hormuz. So how important was that for markets last week?

00:06:01:00 - 00:06:11:00
Tom Hibbert
So it was only rumoured last week. And I say rumoured. I mean, President Trump came out and said that a deal was going to be agreed by Sunday.

00:06:11:00 - 00:06:13:00
Jane Parry
Did you say that was for the 39th time?

00:06:13:00 - 00:07:10:00
Tom Hibbert
Yeah, exactly, so 39th time lucky. But you know, the market was still optimistic about it and we did see quite a big reaction there. So oil down 6% last week, Brent, which is sort of global oil price, seaborne oil price trading at $84 a barrel down from the mid-90s the week before. So quite a big fall in oil prices, a strong performance in equity rally, a strong bond rally as well. So we saw yields falling, gilts performing very well. So a big turnaround optimism around this potential peace deal. And it does look like it's the real deal this time around. So we should see, as long as the agreement is signed and theoretically, you know, there are still things being ironed out, but we should start seeing trade flowing through the blockades lifted and then not a complete normalisation, but the start of a normalisation of global trade.

00:07:10:00 - 00:07:23:00
Jane Parry
Okay. And then the other area that happened last week was back into Europe. The ECB raised rates in what we think is quite a weak growth backdrop.

00:07:23:00 - 00:07:25:00
Tom Hibbert
Yeah, undeniably weak.

00:07:25:00 - 00:07:28:00
Jane Parry
Undeniably weak, there we go.

00:07:28:00 - 00:07:57:00
Tom Hibbert
A lot of the economic data in Europe is surprising to the downside. Growth is sluggish and inflation is a little bit sticky. But the ECB is really reacting to this energy shock. It's a big odd, really, that they've hiked - just as this agreement, just before this agreement, this peace agreement has been signed, we're seeing the ECB hiking rates and it seems like they are tightening into weakness.

00:07:57:00 - 00:08:00:00
Jane Parry
Tightening into weakness.

00:08:00:00 - 00:08:25:00
Tom Hibbert
Exactly, raising interest rates into a slowing and weakening economic backdrop. So I think the ECB needs to be cautious about their interest rate trajectory from here. The market still thinks the ECB has one more hike in them. But you know, I think our view is that that would probably be a mistake. We aren't really seeing the secondary effects of inflation becoming embedded in in the European economy.

00:08:25:00 - 00:08:27:00
Jane Parry
Because of the weakness.

00:08:27:00 - 00:08:45:00
Tom Hibbert
Because of that weakness, yeah, there's less of a transmission effect. And we've spoken about this on the podcast before. But I just think the ECB does need to be a little bit careful about hiking from here. And I think one hike should do the trick, particularly if this peace deal does prove sustainable.

00:08:45:00 - 00:09:10:00
Jane Parry
Great. Thank you. I think it's probably time for me to sum up what's in my Canaccord take away coffee cup today. So, this was a week when markets showed what they still want to believe in, I think. Belief in transformational growth via SpaceX, belief in de-escalation via Iran Hormuz, and belief that central banks can still contain inflation without killing growth. Hopefully anyway.

00:09:10:00 - 00:09:28:00
Tom Hibbert
And the focus is really back on that at the moment. This week we've got the Bank of England, we’ve had the Bank of Japan already, the Bank of Japan has hiked. We'll talk about that next week. Very, very interesting there. And we've got the Fed, Kevin Warsh's first test as Fed chair, so.

00:09:28:00 - 00:09:30:00
Jane Parry
You’ll be very excited, I know you love it.

00:09:30:00 - 00:09:31:00
Tom Hibbert
I'm over the moon.

00:09:31:00 - 00:10:11:00
Jane Parry
But we also would say please don't chase all the excitement of one stock, but rather it's about disciplined participation, there you go. And I did like your phrase: ‘we like to talk about it when the micro becomes the macro’. It's quite unusual for us here on the podcast. So like it, good. So thank you again and thanks for listening to the Canaccord Coffee Break Podcast. Hope you've enjoyed it. And don't forget to hit follow on your preferred podcast channel of choice. And you will never miss an episode. And as always, we'd love to hear your thoughts. Ask us any questions. Let us know what else you'd like to hear about. Drop us an e-mail coffeebreak@canaccord.com. Thank you.
 
00:10:11:00 - 00:10:14:00
Tom Hibbert
Thank you for listening everyone.

00:10:14:00
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 - 00:00:56:00
Jane Parry
Good morning and welcome to the Canaccord Coffee Break podcast. I'm Jane Parry, the Chief Marketing Officer here at Canaccord Wealth. I'm delighted to be joined today by our Co-Chief Investment Officer, Richard Champion, who is going to help us cut through all the noise in the markets, demystify what's happening, and hopefully help you feel more informed, confident and in control of your financial future. So, if you can grab your coffee, let's dive on in and see what was going on. So last week gave us, I think we would call it a classic market twist, with great economic news but falling markets. So, I really want to understand what's going on, Richard, if you can help us understand that - when strength suddenly becomes a problem.

00:00:56:00 - 00:01:37:00
Richard Champion
Well, last week, US equities, which have been leading this amazing rally we've seen since the ceasefire in the Gulf War, fell about 2 1/2 to 3%, particularly on Friday, which was a very weak day. And that was because on Friday there was a monthly jobs report published in the states which showed stronger jobs growth than had been expected. And that has reignited inflation worries and caused markets to reconsider whether we're going to see rate cuts this year at all, and whether in fact, we may instead see increases in interest rates during the rest of 2026.

00:01:37:00 - 00:01:41:00
Jane Parry
So that's all driven by the risk of inflation continuing.

00:01:41:00 - 00:01:59:00
Richard Champion
Correct. So we've had a bit of a bump up in inflation, largely driven by the energy price going up following the war with Iran, but also seeming to have a few more knock-on effects. We are seeing an enormous amount of spending on AI.

00:01:59:00 - 00:02:01:00
Jane Parry
Yeah, we talked about that a lot last week. 

00:02:01:00 - 00:02:29:00
Richard Champion
We've spoken about that in a number of these podcasts. To the extent that at the moment, at the current sort of rate we think that the spending is going on, it's adding about 4.6% to US GDP in terms of that spend, which is a really big stimulus, at the same time as we've got other stimuluses going on from the US government. So, all of that means, as we've spoken about before, the US economy is probably running a bit hot.

00:02:29:00 - 00:02:37:00
Jane Parry
OK. So, labour market resilience, jobs going up, I think manufacturing strength is on a four year high as well, isn't it?

00:02:37:00 - 00:02:51:00
Richard Champion
Correct. So, surveys of manufacturing have shown again really strong numbers and prices paid elements of those surveys have also been strong, which increases that worry about future inflation. 

00:02:51:00 - 00:02:54:00
Jane Parry
And so, all in all, the consumer's still holding up.

00:02:54:00 - 00:02:55:00
Richard Champion
Correct.

00:02:55:00 - 00:03:05:00
Jane Parry
So all very positive statements. So why has that impacted the markets? Why have they gone down if all that's positive backdrop just all about inflation?

00:03:05:00 - 00:04:09:00
Richard Champion
So it's really common for good economic news to become bad market news. The market is discounting the future, so when it sees good economic news, it starts to worry about interest rates going up to control inflation. When interest rates go up, what's called the discount rate, that's the amount you discount future earnings by, also goes up, which means that that number becomes less. When you've got a low discount rate, your future earnings are higher in value today. When you've got a higher discount rate, they're lower. So as that goes up, people re-evaluate what valuation they're prepared to put on the market. And what we had on Friday last week was a classic example of people re-evaluating the highest value parts of the market. Interestingly, we saw some of the lower valued parts of the market hold up perfectly well. But now that AI is such a large part of the US market, the overall impact was negative on the wider market.

00:04:09:00 - 00:04:12:00
Jane Parry
So those, the lower discount, what did you say - the lower?

00:04:12:00 - 00:04:15:00
Richard Champion
The lower valued sectors.

00:04:15:00 - 00:04:16:00
Jane Parry
The lower valued sectors.

00:04:16:00 - 00:04:22:00
Richard Champion
Held up because they're less prone to the squeeze in valuations down from the very high levels.

00:04:22:00 - 00:04:25:00
Jane Parry
So what? What are those? What would be those lower value sectors?

00:04:25:00 - 00:04:29:00
Richard Champion
Healthcare and consumer staples would be great examples of those sectors.

00:04:29:00 - 00:04:34:00
Jane Parry
So, it wasn't really a bad week then after all, it was just a bit more of a reality check.

00:04:34:00 - 00:05:04:00
Richard Champion
Absolutely. I think a reality check is a really good way of putting it. We have had nine extraordinarily strong weeks, driven, as I say, by the technology complex. We've seen gains in some cases of 60 or 70% over that period. So giving a little bit of that back is entirely healthy. It allows a little bit of uncertainty to go into market valuations. We love the saying we're climbing a wall of worry and here is a bit of the worry that we're climbing at the moment.

00:05:04:00 - 00:05:18:00
Jane Parry
OK, got it. I think we also talked about the new Fed Chairman, Kevin Warsh, coming in and I guess this might impact the policy decisions that he's going to make going forward. So what do you think's happening there?

00:05:18:00 - 00:06:14:00
Richard Champion
So, Kevin Warsh is in a quite difficult position. He's been appointed by Donald Trump, who wants him to cut interest rates, almost irrespective of what the economy is doing. But historically, Kevin Warsh has been quite hawkish. He's been quite keen on being early to raise interest rates. He's made a lot of the idea that the burgeoning use of AI will help boost productivity and better productivity is very good because it allows you to grow faster without having inflationary impacts. But it appears at the moment, the weight of money going into AI, plus what's going on in Iran and the Persian Gulf, is making his job very difficult. And so it's going to be very interesting to see, having been appointed by Trump as his man who's going to get rates down, he may well turn around and actually be a bit more hawkish, which would be a surprise from a few weeks ago, certainly.

00:06:14:00 - 00:06:18:00
Jane Parry
So I always have to say hawkish rates flying high.

00:06:18:00 - 00:06:19:00
Richard Champion
Correct.

00:06:19:00 - 00:06:21:00
Jane Parry
Yeah. OK. And dovish going down.

00:06:21:00 - 00:06:22:00
Richard Champion
Yeah.

00:06:22:00 - 00:06:46:00
Jane Parry
OK. So, I did actually quite like the President Trump quote in this week's weekly Markets review. I thought it was a view that many people would intuitively share. And he said, ‘with a great jobs report, just like announced, stocks should go up, not down. That's the way it was for 200 years. Growth does not mean inflation. How else can a country attain greatness?’ Quite an interesting quote.

00:06:46:00 - 00:07:13:00
Richard Champion
Yes, I think that President Trump is being a little bit disingenuous. I think so, perhaps, I've been very, very tactful. It's well-known market aphorism that good economic news is bad for markets. And on the obverse of that, bad economic news is good for markets because the markets looking forward say we're going to get either higher rates, bad for markets or lower rates, good for markets.

00:07:13:00 - 00:07:19:00
Jane Parry
Yeah, OK. And actually some, you know, lower rates if you've got a big mortgage to pay.

00:07:19:00 - 00:07:20:00
Richard Champion
Helps the economy.

00:07:20:00 - 00:07:49:00
Jane Parry
Helps the economy in different ways, doesn't it? OK, interesting. So I think it's short and sweet this week. Maybe we're on a little double espresso with extra sugar rather than a flat white on the coffee break this week. So, I think I will sum up by saying after nine weeks of gains, this pause is healthy, but not alarming. Rates are staying higher for longer, that's still plausible. Resilient growth is still a positive backdrop. So this isn't about a weak economy, it's about a strong one just adjusting to slightly tighter conditions.

00:07:49:00 - 00:07:55:00
Richard Champion
Correct. And, and just to be clear, we're talking about the US specifically, rather than the wider world economy.

00:07:55:00 - 00:07:57:00
Jane Parry
Do you want to touch on the wider world economy?

00:07:57:00 - 00:08:23:00
Richard Champion
Why not? I mean, the wider world economy continues to be pretty weak, in fact. But the inflationary impacts we're seeing may mean that the European Central Bank, for example, this week raises rates because of it, seeing the inflationary impact coming from the war in Iran. But that's going to be raising rates into a weak environment, which isn't a great place to be. Everyone's focused on the US, where the economy is much stronger.

00:08:23:00 - 00:08:25:00
Jane Parry
And it's such a big market.

00:08:25:00 - 00:08:26:00
Richard Champion
It is a huge market.

00:08:26:00 - 00:08:31:00
Jane Parry
Yeah. So strong economies don't always lift markets, it seems, especially when inflation is still in the room.

00:08:31:00 - 00:08:32:00
Richard Champion
Correct.
 
00:08:32:00 - 00:08:53:00
Jane Parry
OK, thank you very much and thank you for listening to the Canaccord Coffee Break podcast. I hope you've enjoyed it. Don't forget to follow on your preferred podcast channel of choice and you will never miss an episode. And as always, we'd love to hear your thoughts. Do drop us a line, ask any questions. The email address is coffeebreak@canaccord.com. Thank you very much.

00:08:53:00 - 00:08:55:00
Richard Champion
Thank you.

00:08:55:00
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 - 00:00:23:00
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 delighted today to be joined by Tom Hibbert from our Chief Investment Office.

00:00:23:00 - 00:00:25:00
Tom Hibbert
Good morning, Jane.

00:00:25:00 - 00:00:44:00
Jane Parry
Morning, morning. As you know, Tom is our Chief investment Strategist and here to help me cut through all the noise about what's going on in the markets. And hopefully then you can feel more informed, more confident and more in control of your financial future. So this week, Tom, I see that markets are hitting fresh new highs again.

00:00:44:00 - 00:00:45:00
Tom Hibbert
Absolutely, yeah.

00:00:45:00 - 00:01:04:00
Jane Parry
And apparently, this is all about earnings, not just about hype, and it's the earnings that are driving the rally. AI is still the headline story, but there is a slightly uncomfortable question building in the markets right now. And that is, is AI actually starting to create inflation rather than to suppress it?

00:01:04:00 - 00:01:05:00
Tom Hibbert
Yes.

00:01:05:00 - 00:01:06:00
Jane Parry
So I want to get into that.

00:01:06:00 - 00:01:07:00
Tom Hibbert
Absolutely.

00:01:07:00 - 00:01:50:00
Jane Parry
So, grab a coffee, let's get into it. So, as I say, if you just glance at the headlines, you might think this is a familiar story, with US equities up again 1.6% last week reaching new highs and tech leading from the front. But there are two layers to what's happening right now that I want you to talk to me about in a bit more detail because they shape everything from investment returns to where interest rates might go next. So the obvious one is all around AI enthusiasm, investments flowing into technology, markets continuing to climb, which we've touched on before. I think the more interesting one is that the rally is being earned, not just imagined or hype. So, can you just talk to us a little bit more about that so we can understand it?

00:01:50:00 - 00:01:56:00
Tom Hibbert
Yeah, of course. And you know, the sun is definitely shining on equity markets at the moment in the US.

00:01:56:00 - 00:01:59:00
Jane Parry
Unlike the rain out the window as we sit here in London with a tube strike.

00:01:59:00 - 00:02:02:00
Tom Hibbert
A bit of a damp day, yeah. But –
 
00:02:02:00 - 00:02:04:00
Jane Parry
Give us some positivity then?

00:02:04:00 - 00:02:09:00
Tom Hibbert
There's a lot of excitement and enthusiasm. You know, we've got the SpaceX IPO coming. We've got Anthropics IPO.

00:02:09:00 - 00:02:11:00
Jane Parry
Oh yeah, I just saw that on Bloomberg.

00:02:11:00 - 00:03:10:00
Tom Hibbert
There's a ton of excitement and hype out there, but what's interesting and what I think makes this rally quite durable is the fact that it's really justified by the strength of earnings that are coming through, not just in the tech sector. I mean, tech steals all the headlines and that's where you're seeing the growth. But we've now had, in the US, six consecutive quarters of really solid double-digit earnings growth. The most recent quarter we had 20%, over 20% earnings growth. So this rally is not being driven by fear of missing out, FOMO, but it's an earnings driven story. And you know, forward earnings last week, that's basically what analysts see over the next year, hit a record high last week for the US. The whole market, technology as I've said and you know it's led for a long time, but still leading. Analysts see earnings growth of 47% -

00:03:10:00 - 00:03:11:00
Jane Parry
In the next year?
 
00:03:11:00 - 00:03:12:00
Tom Hibbert
In the next year.

00:03:12:00 - 00:03:13:00
Jane Parry
Wow, that's huge, isn't it?

00:03:13:00 - 00:03:35:00
Tom Hibbert
And next year, in 2027, 32% growth again. In 2025, we had 25% earnings growth. So, we're already seeing numbers come through and there's a huge amount of excitement around the earnings-powered climb for the US equity market at the moment.

00:03:35:00 - 00:03:43:00
Jane Parry
So why is that so important compared to, you know, previous rallies or hype or fluff?

00:03:43:00 - 00:03:55:00
Tom Hibbert
Yeah. And you know, I think it's very cautious when you see very strong performance and a very momentum driven market, there's a lot of excitement, there is a lot of hype. It's important to look at the valuations.

00:03:55:00 - 00:03:57:00
Jane Parry
Yes, because are they getting stretched then?

00:03:57:00 - 00:04:06:00
Tom Hibbert
Yeah. And the markets are expensive, but you can have a period of strong performance where you see multiples, price to earnings multiples, really increase.

00:04:06:00 - 00:04:07:00
Jane Parry
Explain that to us then.

00:04:07:00 - 00:04:30:00
Tom Hibbert
So it's the amount you pay per unit of a company's earnings, price to earnings multiple. So at the moment the whole US market is trading on 21 times price to earnings. That is quite expensive. It's above the long run average, but you're paying up for this earnings growth and you know, in the late 90s during the tech bubble, that same multiple hit 40 times.

00:04:30:00 - 00:04:31:00
Jane Parry
OK.

00:04:31:00 - 00:04:40:00
Tom Hibbert
If you isolate the tech and tech related companies, they're trading on 23 times earnings. So that's not massively expensive and when you have earnings?

00:04:40:00 - 00:04:44:00
Jane Parry
Versus the broader market you said at 21 times. 

00:04:44:00 - 00:05:22:00
Tom Hibbert
21 times, yes. And when you see the earnings growth that we are seeing, it can justify those high valuations as long as that earnings momentum is maintained. So strong earnings and strong earnings growth can justify high valuations. And that is what we've seen consistently for a while now. And you know, you look at the corporate landscape, the earnings landscape, it really still looks very positive. The outlook there is still very positive. So that makes this rally, this market, much more durable than something that is purely driven by hype or an irrational exuberance. There's no or there's not a huge amount of rationality.

00:05:22:00 - 00:05:32:00
Jane Parry
OK. Got it. So, investors are paying a premium, but it's a reasonable premium relative to growth that's forecast exactly or growth that's coming through and forecast.

00:05:32:00 - 00:05:33:00
Tom Hibbert
Exactly.

00:05:33:00 - 00:05:47:00
Jane Parry
OK. So another healthier signal is that this rally seems to be broadening out a little bit. So it's not just about the mega cap stocks anymore, with earnings growth seen across other sectors. Should we just have a little dive into that and what's going on there?

00:05:47:00 - 00:06:17:00
Tom Hibbert
Sure. So if you look at the broader markets, we saw expected earnings for the large caps hit a record high last week, but actually the same for the mid and small caps as well. So the earnings momentum is positive for the entire market, but it is still, you know, the epicentre of that strength is still a tech story. But you look at the amount of investment, the amount of spend, the insatiable demand for energy, you're seeing the beneficiaries across the market.

00:06:17:00 - 00:06:20:00
Jane Parry
So it's dripping down all the way through the market.

00:06:20:00 - 00:06:29:00
Tom Hibbert
Yeah. So I mean, you look at, now you're seeing a huge investment in clean energy, for example, and the clean energy index is up 43%.

00:06:29:00 - 00:06:30:00
Jane Parry
Why is that then?

00:06:30:00 - 00:06:36:00
Tom Hibbert
Well, it's driven by insatiable demand for energy, particularly of things like data centres.

00:06:36:00 - 00:06:40:00
Jane Parry
Because - so AI drives the energy demand, drives data centres.

00:06:40:00 - 00:07:01:00
Tom Hibbert
Exactly. And the quickest way, and also on the back of this geopolitical risk and the energy shock that we're seeing, there's more of a drive to be energy independent, for countries to be energy independent. The quickest way though, fundamentally, to get new electricity into the grid is through renewable sources. So solar is doing really, really well at the moment and that's -

00:07:01:00 - 00:07:05:00
Jane Parry
And that’s not just the puff about clean energy, is it? That's a genuine need for it.

00:07:05:00 - 00:07:11:00
Tom Hibbert
It’s driven by economic utility rather than this idea of carbon neutrality.

00:07:11:00 - 00:07:12:00
Jane Parry
Economic utility, like it.

00:07:12:00 - 00:07:45:00
Tom Hibbert
Exactly. So there's that and then you've got the, there's a human demand for all of the commodities, the real-world assets that that are going into this infrastructure spend. So copper hit an all-time high in in May and we're seeing the material sector performing very well. So data centres, there's energy demand, the physical build out behind AI. We're seeing a broad impact across the market. And you know, generally the US economy has been very robust. So the corporate landscape across America is pretty strong at the moment.

00:07:45:00 - 00:07:49:00
Jane Parry
So AI isn't just code, it's steel, power and infrastructure.

00:07:49:00 - 00:07:51:00
Tom Hibbert
Yeah, absolutely.

00:07:51:00 - 00:07:59:00
Jane Parry
So we've been told that AI is all about productivity and that productivity should lead to lower inflation over time.

00:07:59:00 - 00:08:00:00
Tom Hibbert
Yes.
 
00:08:00:00 - 00:08:17:00
Jane Parry
So this is kind of the nub of what I wanted to understand this week and what I think is quite interesting is that we've gone from asking will AI reduce inflation to is it actually adding to it in the short-term and this sort of tension that's now emerging between AI and inflation?

00:08:17:00 - 00:08:50:00
Tom Hibbert
Yeah, which is coinciding with, you know, already we've had sixty months now of inflation in the US being above the Fed's targets. It's coincided with this higher oil price on the back of the Iran conflict. So, the main argument that the chair of the Federal Reserve had for cutting interest rates this year was the productivity gains that we were seeing on the back of AI. And at the moment, because of this, this huge amount of investment and spending and the AI build out, it's actually putting up with pressure on prices.

00:08:50:00 - 00:08:54:00
Jane Parry
Yeah. So it’s as that translates into the real world and supply and demand.

00:08:54:00 - 00:09:28:00
Tom Hibbert
Yeah, exactly. And last week, you know, we had PCE inflation, which is a measure that the Fed pays very close attention to. It rose to 3.8%, which is the highest since March 2023. I think the fact that this AI-heavy investment, the rising energy demand, supply shortages, AI is putting upward pressure on prices and that is forcing the Fed to recalibrate their assessment for interest rates, the trajectory of interest rates. And that is an increasing risk that we are paying close attention to at the moment.

00:09:28:00 - 00:09:36:00
Jane Parry
So just thinking about all that then in context of clients and their portfolios, what should investors be doing and thinking about?

00:09:36:00 - 00:10:15:00
Tom Hibbert
Yeah, I mean we're very positive for the outlook for, you know, equities, yes, you have to pay, the markets are expensive and we're a little bit cautious there. But the fundamental picture is very strong from a corporate perspective. So, while we're optimistic there, we are carefully looking at how the Fed is reacting to these inflation woes and the increasing risks around that. And obviously that can have a significant impact on the economy, so on the bond markets and on the equity markets as well. So, that is a key risk for us at the moment and something that I think we're at a potential turning point of. But other than that, you know, we're pretty positive.

00:10:15:00 - 00:10:22:00
Jane Parry
OK. So, I think, as ever, we normally say stay balanced, don't stay over concentrated in one part of the market and stay awake.

00:10:22:00 - 00:10:31:00
Tom Hibbert
Yeah, I think that's true. I think the thing is, things are expensive, but good and there is a risk of inflation picking up again here.

00:10:31:00 - 00:10:58:00
Jane Parry
Well, thank you. It's probably time for me to sum up what is in my Canaccord take away coffee cup today. So the rally isn't being driven by hype or not only hype, but mainly by earnings. It's broadening out, especially to those sectors that are supporting the AI build out as you called it, so physical, the physical build out behind AI data centres etcetera, as well as into mid and small cap stocks. So that's another positive.

00:10:58:00 - 00:10:59:00
Tom Hibbert
Absolutely.

00:10:59:00 - 00:11:07:00
Jane Parry
But the same forces that are powering the markets may also be keeping inflation and therefore interest rates higher for longer, which might have an impact.

00:11:07:00 - 00:11:09:00
Tom Hibbert
The US economy is running hot.

00:11:09:00 - 00:11:13:00
Jane Parry
Running hot. I think Richard Champion said that to me last week as well.

00:11:13:00 - 00:11:13:00
Tom Hibbert
Did he?

00:11:13:00 - 00:11:36:00
Jane Parry
He did, yeah. And at that time, the weather was hot. That's all for this week. Thank you very much for listening to the Canaccord Coffee Break Podcast. If you've enjoyed it, please don't forget to hit follow on your preferred podcast channel of choice. And you will never miss an episode, Tom. And as always, we'd love to hear your thoughts. Ask us anything you want. Drop us an e-mail coffeebreak@canaccord.com. Thank you.

00:11:36:00 - 00:11:37:00
Tom Hibbert
Thank you very much.

00:11:37:00
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.

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