Hello, John, Hi will now John, inflation right, A lot of people have been expecting CPI in the UK to fall and fall quite significantly. The whole transient argument is back. Oh look, energy prices are falling. Fuel prices are falling. Oil prices are falling, and so what we're going to see is lower inflation numbers coming through and we kind of have it. It's we need tiny bit. But today's numbers came in significantly higher than people expected.
Right, we now have had CPI above ten percent for months and months and months. It will take and it doesn't seem to be falling back. You've written about this, right, what's your explanation? You know what mine is anyway.
Well, I mean it's just that inflation keeps coming in higher than the Bank of England can those wishful thinking and makes it makes it harm. I mean in April we will see a sharp fall and that will go
below double digital. It's because effective atithmetically it simply cannot The rate it sign now, but it'll probably fall is something like seven and a half or eight percent, and you know that will sound like a law, but it's still higher than the Bank I'd hoped it would be, you know, as recently as fair Beauty and it's saying but.
It's worth reminding everybody that the Bank of England target is two percent and an inflation is currently five times the Bank of England target. I mean this represents a policy fail failure of such stunning scale. I'm amazed for not talking about it every single day. We talk a lot about the inflation numbers, but how often do you hear someone on the radio in the morning saying, wow, five times the Bank of England target. Can we get someone from the Bank of England on to explain it?
That's like getting someone from one of the top managers of the NHS on to explain the mess up at the NHS, right, We never hear from them.
Well, it's true, and utiliarly talks about it during the press conferences after the interest rate meetings either. I mean, I think that's interesting in itself because there is that sense or that understanding that an awful lot of this stuff is beyond the control of central banks. So the fact that you set a two percent target doesn't mean that you're going to get two percent. And it's almost
everyone takes that. Yeah, I mean everyone seems to take that for granted, to the point where you're not actually holding the central bank governor accountable for something that in theory he's accountable for. And I mean even has to write those stupid little letters to the Chancellor, you know, every couple of months saying, oh, you know, I'm sorry that inflation is you know, below one percent or above three percent. Here's why, it's basically not my fault.
So what's the point What is the point of the Bank of England, What is the point of any central banks? You've literally just talked from out of a job? Well, I mean, I mean they have one job.
I don't really think that central banks are necessarily a good thing in the first place. I don't know what the mechanism is that you would replace them with. But you know they're already basically chasing the market the whole time anyway.
Yeah, but it just tells us that we're not quite as close to peak rates as we would have expected. Now, listen, there's one number that really really stands out in these inflation numbers that we've had this week, and that is food inflation over nineteen percent, an absolutely extraordinary level of inflation. And also, I think we can be pretty certain that farmers are not seeing in nineteen percent rise in the
prices that they're getting. So this is part of this new dynamic that we're beginning here a lot about greed inflation, where companies are taking the opportunity of crisis and disaster to effectively profit here. You know, they did it during the pandemic the beginning, at the beginning of the war, and they are still doing it. They're shoveling up their profit margins to increasing their supernomal levels to take advantage of this slightly chaotic period in time. And that seems
like something that surely can't continue. And if it does continue, there would surely be political pressure on the corporate world to just stop.
I mean, you would think particularly food inflation, because food inflation is extremely visible. You know, I don't know why anyone regardless of you know, can I wealthy or not wealthy, who doesn't look at the shopping bell at the moment and say, hold dn a minute. You know last week that was you know, about ten percent less than it is today. So yeah, not that's especially given that you know the government has this they dam having the inflationary
by end of the year. There's quite be some political pressure to be out as long as they can find a smoking gun for this stuff.
Well, I mean, this is the sort of time when you would expect margins to be falling. You'd be looking at the cost pressures, you'd be looking at the pressure on consumers at the same time, and you'd be saying, this is exactly when you expect the profit cycle to turn and margins to be lower, instead of which they're going up and up again.
Well, I mean that's interesting. I mean I know that. I mean one reason I think that might be the case is simply because I think the consumers are probably in better shape than we are given the impression that they are. And so that's one reason why this perhaps let's push back against these higher prices. Are you a cost respect.
Hang on, are you a cost of living crisis denial? John?
You know, I know as much denying that there's a course of living crisis, But yes, I'm denying the people are in the sort of unable to spend. I mean, everyone's get jobs, and there are some people are getting a certain amount of extra wages, and so far, to be fair, they still seem to be able to pay their mortgages and things like that as well. I mean, it's still a lot of fixtrates to come off this year.
Something's got to explain how these companies I mean, I mean, the supermarket sector in the UK, like the banking sector, is pretty competitive, and so if if they're managing to push through super super normal profit margin prices, then that means that somebody must be sucking it up somewhere, and if the consumer is sucking up, it implies that they
have enough money to do so. Now I'm not I mean, I I don't like the idea that people are getting, you know, profiteered from due to this kind of confusion, and I think that if that's happening, then you know, we need to look at it. You know, it's not a it's something the politicians should take a week look at the fact that it's.
Even about some price control place controls.
That's a great idea. Always words, let me.
Tell you, Let me tell you about rent controls, which we now have in Scotland is an Atholte classic of the price control genre. And when they first introduced rent controls for Scotland last year, I think all of those were some vague knowledge of economic history, etc. Again, you know, there's been tried a lot of times before in it
never ever ever works. Because if if the market is telling you via high prices that you have maybe too much demand or not enough supply or both, you want to policy that either reduces demand or increases supply, right, and rent controls do exactly the opposite. Make stuff cheaper, you increase demand, reduce the return to suppliers, and you reduce supply. So you know, that seems obvious and it's borne out by many, many case studies. So the Scottish did it anyway, I guess.
What what's harming?
Well, do you know what, sten This is the one time it worked because Scotland is special. Now no, it's not working for started suppliers, suppliers falling land laws are pulling out, the build to rent suppliers who were just beginning to get reasonably big in Scotland are pulling out or delaying things. Talking about there was a reporter from the British Building Federation in which many of the big providers noted that they found Scotland an unattractive place to
think about investing because of the political risk. And then here's a really interesting little dynamic. You can actually see what's happening to rents, and despite the fact that they have been frozen, they're still going up because every time a property comes to the market again, there's a new roopdris between tenants. The landlords put up the rent as much as they possibly can because they know that their
future potential to put at rents is limited. So you'll see in cities Glasgow, Edinburgh, et cetera, rent's going out fourteen to fifteen percent. And of course when we get to the beginning available when you can put your rent up by three percent, everybody will put their rents up
by three percent, So the cab becomes a target. Anyway, I only tell you about it because absolutely standard stuff and mostly mostly the results of policies aren't one hundred percent predictable because there are various sort of external forces and things can things can turn out differently, but not rent controls. Not rent controls. We have so much evidence.
No, I mean, that's I think that's really interesting because for two reasons, like one, actually in areas that aren't rent controlled, like you know the rest of the UK, it's basically the same dynamic. The landlords aren't generally putting rents up for certain tenants because they're just glad they've got a certain tenant and one particularly who's low hassle, and that's a big deal. You don't really want to
kick people over a few percent. But as soon as people leave, you know, yeah, rents are getting jacked up by double digit rates. So the same thing is happening, only you don't need to have imposed any event controls. And then the thing about the three percent, it's like, as you say, it turns from being a cap and a target and everyone can raise it at the same
time because they all know what the target is. And so effectively you've kind of created a massive monopoly market because now everyone knows that there's not going to be anyone undercutting them because everyone's going to raise their rates by three percent exactly at the same time. So the tenants are a captive market. So I just I just wish people would think about the consequences of the policies beyond doing something that sounds good.
It's so.
Frustrating.
It's frustrating, But you know what, here's a prediction for you. We have decades of history showing as that rent controls don't work and effect have negative effects. We have a live example, a live case that you can watch in real time in Scotland. You can see it failing. You can read the failure and the numbers. But I bet that the calls for rent controls in the rest of the UK and around the world will continue. I know that the Sidik can in London has been calling for them.
You will see more calls for them and you will probably get rent controls in more major cities in the UK because we are so back to the seventies.
Oh yeah, I mean Sidik's been calling for them since before Scotland even introduced their stuff. So yeah, I mean he's not going to change, you mean, I mean, yeah, you're good.
Yeah, but do you know what that tells you landlords? And there's messages here, messages I'm going to write about this. In fact, I in the middle of writing about this, there are messages from Scotland for the rest of the UK. All these property bubbles are high price of housing. It makes you want to do something, don't do this. And then there's a message for landlords the government shouldn't do this, but it probably will take action.
Yeah, I mean, do you do sort of sitting in and think, well, look, if I'm a landlord just now and I own a properly then on the one hand, yeah, maybe I'm going to face a bit of political hassle. On the other hand, I'm going to have a semi kind of protected market, and much the same way that you know, Facebook and all the rest of them call for regulations whenever they if they're in the dominant position. So I know, I mean, you know, rent controls are
in a funny kind of way. They do give you that if you know you're going to get a nice predictable three percent uplift every single year, and then an extra you know, twenty twenty percent every time somebody moves out. Do you know, maybe it's not such a bad Do you know what this has to be?
In I can introduce you quite a few people in Edinburgh who may want to sell you a too big or that well told.
Thanks good, thank you.
Welcome to Marin Talks Money, the podcasting which people who now the market's explain the markets. I'm meren Sunset Web. This week's special treat a conversation with Simon Edelson, manager of the Artemist Global Select Fund and co manager of the Midwind Investment Trust. Actually, before we get any further Samon, do you know I call it the Midwind Investment Trust, but sometimes I'm tended to call it the Midwind Investment Trust. What's the actual real answer, because I hear both all the time.
Well, the last time I was in Dundee, which is where Midwind Street is, the locals call it Midwind, So I'm sticking with that.
You're sticking with that, Okay, brilliant. And one of the things that I want to mention before we get started is that you have a fabulous where record of spending long periods in the top quartile, etc. So that you've had a very successful career and now you're leaving it. You're retiring at the end of the year and handing all this over, and we'll talk about the person you're handing it over to briefly at the end, so everyone knows whether they should sell immediately or hang onto the
long term. But we'll come to that towards the end because Fus, obviously we want to talk about you, so thank you for joining us.
You're welcome to light to be here.
Good now, I have just been looking, which I didn't mean to, actually, I was just googling the performance of the Midwind Investment Trust so I can see whether it be polite or route to you at the beginning of this, and I found an interview that we did a couple of years ago, twenty nineteen, and it was very prescient, very prescient, all about you had recently been on stage with the managers of Scottish Mortgage, and you had been We talked a little bit about that because I had
also recently interviewed the managers of Scottish Mortgage, and we talked about the importance of growth and how amazing it is to be invested in exciting companies which are disruptive and growing at speed and doing brilliant things that will lead the world forward, but also about how important it is to make sure that you buy those stocks at
the right price. And you had, I think at the time, just sold out of Amazon and a few of those sort of similar names, and obviously Scottish Mortgage was hanging onto those and you were right.
Well, yes, we did think that valuations would come under pressure a couple of years ago, and so we sold a few of our technology shares, which we've made a huge amount of money in over the years but we just felt that there come points in markets where everyone's in the same place, everyone's in the same stocks, everyone's pointed in the same direction. Now this doesn't mean these
companies aren't good. I mean most of them have actually performed very well over the last few years, but the share prices have gone down because they were priced to perfection, and they were priced to perfection also against very very artificially low interest rates.
So we'd had very low interest rates before.
The pandemic as a result of the financial crisis at the end of the two thousands.
And then those interest rates kept even lower.
So a lot of what's happened over the last couple of years has just been interest rates getting where they normally are, inflation getting where it normally is, but quite a big all off in the share price of these companies, despite those companies still being pretty good businesses.
What's interesting, isn't it that over this lengthy period of falling interest rates and brilliantly performing equity markets, large groups of people came to believe that their good performance was a result of brilliant stock picking and skill, when in fact it was to a large degree a function of that. We could come on to central banks in a minute actually talking about this kind of thing, whereas in fact it was a function of more global global economic dynamics and movements.
I'm afraid that that's always right. My old boss, Neil's Taup, who started farm management in nineteen forty six, and I've met him when he was about seventy, and one of the things he said to me, which always seemed to be a joke but now seems to be less of a joke, is that as people get wealthier, it turns out that they think that they're cleverer than they were. I mean, of course, the trouble is that some of them were just luck and some of the times we
live in are easy times to make money. I'm afraid the last ten years was an easy time to make money until two years ago, and the period we're in now is probably going to be a bit more tricky. Ask for a bit more certainly, a bit more valuation discipline, because suddenly we have the option of leaving money in the bank. I mean, you'll lose purchasing power if you leave money in the bank, but.
At least you get more than nothing.
Well, you saw, I'm sure about the new Apple bank account will not quite bank account, but deposit to arrangement where you can get four point Indeed, now, why would you not do that? And also why would you not? Why would you not on your investment account? And of course I've done this myself because I had a reasonable amount of cash in my investment accounts, which Harger's landsdown, except for we're making a large amount of money from you by paying me no interest at all. And now
I've moved a doll landed guilts. So you know, as presumably everybody has, and that has consequences, doesn't it.
Yes, well, well, of course this sort of movement is what caused an American bank to fall over, quite a small American bank, but all the same, bank failures don't come along all that often, and when they do come along, one ought to pay attention to them. So this American
bank called Silicon Valley Bank. He got a couple of things wrong, including having a city name, But the main thing was the main thing was that the people who left the deposits there were all quite switched on and all quite plugged in, and so it only took them a very short period of time to move their.
Money out of that bank.
Into money market funds and the equivalent of US treasuries where they have better security and a high yield. I mean, what's not to like. A friend of mine was heady skiing in Canada and saw some of the largest depositors doing it, moving this money on their iPhones that Friday night. So I mean, we live in a world where the frigidities in the system that rudely exposed from time to time, and everyone says, well.
Similar things won't happen around the rest of the world.
And certainly, you know, the credit suitel issues are more down bad management than deposits moving around. But if you're moving your deposits, and I have to say, I've been moving my deposits as well, and I move and I check my interest s right on the small cash balances we have on the funds to make sure that you're getting at least at least three and a half percent in the UK at the moment, and I'm afraid most people aren't. So that's tip number one, but it is it check your deposit account.
I could see that one.
That is possibly the most important. I mean, I know you're going to say, piles more interesting things as we go on over the next half an hour. But I have to say I believe that this is the most important financial advice you can give anyone in the UK
at the moment. If you look at your deposit account, I bet you will find that you're still making one percent, one and a half percent, possibly significantly less, and you can move that money and make a risk free two or three percent points more in a matter of minutes. Well I don't know how many minutes it takes to open and your bank account these days, but not very many minutes. And you could do that even as I say in your investment catch, just by buying short, short
dated guilts. So if you haven't done that, you're literally throwing money away. You're giving it to the big financial institutions who you will always tell me that you hate every time I talk to the little to hate their bank. Well, you know what, you can take your revenge now, This is the time to take your revenge on the retail banks that you just like so much. Go for it,
do it. They may all go bust as a result, but you know whatever, do it anyway, Do it anyway, right, Simon, Let's stick with interest rates and inflation, because this is the key dynamic in markets.
Right.
You said a few minutes ago that we're getting to the point where interest rates are normalizing and inflation rates are normalizing. They're coming back to where they should be. Now that I agree with you. But if you move interest rates from the lowest they've been ever back to normal levels, if we think of four to five percent as being normal levels, and you do that faster than in restrates have ever risen for forty years, you've got
to break stuff. And everyone is now talking about what breaks, how it breaks, and how long this can go on for.
Yes, and I would be very nervous about that. You don't tend to find the unexploded bombs all that quickly. People like to hide them for a long time. So long, long periods of low interest rates tend to lead to a number of companies which would normally have gone bus not going bust. In fact, the furlough loans from our government, who might remember, were specifically designed to stop people going bus during lockdown and did a very good job.
But it means.
That the normal failure on average of businesses around the world hasn't happened. Where do you want to be careful at a time like this, The classic places to be careful are real estate investment. Now the real estate shairs in the market have actually fallen so far that I don't think stock markets being silly about this. I mean, shares in stocks like land securities are half what they were before the pandemic, and actually they haven't borrowed as
much money as they used to. So that's probably an area where people know to worry, and it's right to worry. Private individuals, i'm sure will know some young families who've recently taken out of mortgage for their first home who didn't expect mortgage rates to go up this far, So it'll also have an effect, i'm afraid on a few unlucky people who weren't expecting mortgage rates to go up, and it will squeeze consumer spending later this year, so
one needs to keep an eye on that. But the part of the market which I think is debt funded and isn't understood is being debt funded is what I call immature technology and immature biotech. So we know that the last cycle was built up out of people getting very excited about technology stocks and a lot of them doing very very well, but they themselves got used.
To free cash.
They got used to being able to hire very large workforces, pay them in shares, and expect to build their business and come to the market fairly early to pay everyone off. And all of those gates of clothes. The banks aren't able to lend them any money, even if they've got a good app or a good new drug in development, and the stock market won't allow them to ipo that early. So I'm afraid that there's probably going to be quite a lot of quite good businesses out there which just
going to find their timing very unfortunate. And this is in a part of the market most people at the moment think is really safe. They think technology is not debt funded. Well, we saw from Silicon Value pank it is debt funded. You know, everything has to be paid for. It's just it's not in loans against real estate, which was the classic problem from previous cycles.
What about the wall of money we keep hearing about in the private equity world that is just sitting there to pick up all these companies and help them out.
Yeah, well it might be a bit stretched, because.
I know that you see an interview every now and the chairman of the Midwine Board Professor Russell Napier, who now tis no tis from telling anyone who listened, including me, that the total amount of debt in the system is
so much higher than it ever has been. And what I find interesting about his point here is that the large public companies that I invest in, the Googles of this world, the Thermo Fishers of this world, the Seamens, even these companies actually have got much less debt than they've had for most of my career, which is quite a long one. So it's not public companies who borrowed a lot of the debts seems to be in private equity.
And so although the private equity people you know, are still around and looking to pick up anything from a full seller, and you see the odd bid out there, one suspects that the total amount that the adjustment that they're going to have to face from a zero interest rate world to a three and a half percent interest rate world could be quite tricky and.
It's very opaque.
So I suspect that when the unexploded bombs go off, some of them will be in the private equity world. But trying to find out where is almost impossible because they don't unlike public equity people, they don't have to give out that much information.
Mmm. And that is why, of course, too many of the private equity trusted RAINI on such what been great discounts, isn't it because no one quite trusts what's going on under the bonnet.
Yeah.
And also they will have a lot of these early stage growth companies.
I mean, there's lots of different sorts of private equity.
Some take private very old companies like Cabre's, and some of them just start up small bar tech and small tech. But again, I remember in two thousand and two thousand and three, right at the end of the TMT bubble, the big quota stops went down first. But even in two thousand and three, it was the unquoted s which were still being written down, and they had to be written down to zero most of the time.
Yeah. No one wants to write the stuff in their actually portfolio down do this, so the longer they can hold it off, the better.
Yeah.
And the rules this is where it all gets quite difficult. But the rules on how you write it down are quite hard to apply. Whereas in public markets you just look at the share price, the market makes forces you to face reality early.
Okay, Well, let's talk about the listed market then, and when we did that into you. I was talking about earlier in twenty nineteen, one of our big topics of conversation with valuations and how it was very, very hard to find any particular sector or geographical market where you could invest and do so at at a price that made long term sense. I think at the time you were still relatively interested in the Japanese market, which was looking relatively cheap. Still is And how has that changed
over the last three years. When you look around, do you see more or possibly less that looks reasonable value.
I'd say that valuations are not particularly cheap. I would say they're okay. I mean the global equity universe that I look is dominated by America and the standard and pauses on seventeen times earnings in a yield of one point.
Seven percent for next year.
So with that hurdle that you can get three and a half percent in the bank, going off and buying a load of BAC is not the easiest thing to do. You've got to have a reason to do it. On the other hand, three and a half percent in the bank is probably going to lose you a bit of purchasing power if inflation stays where it is now. The good news on inflation, there are two bits to inflation.
One bit is the cost of living, you know, prices, and the good news on that is that the oil price is a lot lower now than it was a year ago. So we live in a world of eighty five dollars brent one hundred and twenty three dollars a year ago when Putin went into Ukraine, So we probably won't see so much inflation in goods prices this over the middle part of this year, over the summer, which is good news. On the other hand, wage inflation is still holding pretty high and that will feed inflation in
other areas. So the inflatory pressures are less than they were, but they're still high and they still make a difference to which stock you want to be in.
Yeah.
So do we think valuations are cheap? We think that they're okay. Do we think the world is a safer place to go into, Yes, because inflation might have shot out even further last year, and it seems now to be sort of leveling out a bit but very persistent. So we're not going to expect interest rates to go down anytime soon. So what does that mean in terms
of stocks and shares? Where you've got you've got to buy stocks that are growing, and you've got to buy stocks that aren't going to where you're not going to give up most of your gains to wage inflation. And you've got to buy stocks which don't spend too much time talking to their bankers. Now, fortunately there are quite a lot of stocks like that, and those stocks are generally a little bit more expensive the index, but you get a lot more back for the fact that they're growing very fast.
Let's just go back one step, because we keep talking about value evaluations. Let just want to ask briefly, what when you talk about value, what do you mean? What represents value to you?
So the two things that I keep an eye on are how much free cash flow you get per share after all costs, including stop based compensation, which is a big, big factor.
In American companies.
Ignoring stock based comp is one of the biggest errors, I think in the last couple of years, because a lot of technology companies have just been paying their staff in shares, and when your share price goes down, all these people look at their share options and they say, I haven't got any money, and they're highly paid computer programmers, and they're very mobile. So suddenly that stop based compensation, which hasn't been a cash deduction from earnings, hasn't been
a scene as a cost of the business for shareholders. Suddenly, if you want to keep your programmers, you've got to start paying them some cash. So this happened again in two thousand and three. So you can suddenly find if you don't adjust these earnings figures properly, you can find a sudden, very sharp increase in the costs, very sharp
decrease in what's left over for shareholders. And in the case of big companies like Facebook or or Amazon, Amazon has I think one point five million employees, many of whom are not on high wages, most of whom work at work in the warehouses.
But they're still facing at a lot of cost inflation.
And people people in the technology sector are not used to modeling for cost inflation. It's not what they're interested in. So you've got to keep an eye up for that sort of thing. I should just add something you mentioned by Keyness on Japan. I should mention Japan was dreadful last year. I know, so I took my profits, we took our profits in the fund in some of these technology shares, and we wanted to get better value for money.
And the other side of the valuation inequities that we love is how much book value you get per share, because if the earnings of a company disappoint, you've still got the sort of intrinsic value of the business. So we think it's worth trying to work out what would this business be worth even in really bad economic conditions. And Japanese companies you get a lot of company for your money, You get a lot of plant, you get
a lot of market share. They don't always make a lot of money, but they do dominate certain industries around the world, so you have that resilience.
Unfortunately, the end went.
Down a lot last year, and that meant that our Japanese investments didn't perform very well. But I am much more positive about Asia in general this year, and I think one of the things which could be really really positive for investors, on top of inflation being under control, is just that Asia was still locked down until the end of last year, particularly China obviously with the extended
COVID measures and China coming out of lockdown. Japan coming out of lockdown late could be one of the more exciting global trends on consumption and industrial demand over the next twelve months.
Okay, so Asia is a big theme for you. Yeah, how are you playing that theme?
So we have double the index waiting in Japan.
So we have about eleven or twelve percent of the midwide pork value in Japanese equities. There are three groups of them. We own Japanese banks. Japanese banks would love it if inflation persisted because at the moment, interest rates in Japan are zero more or less, and so banks prefer to lend it a bit more than zero. So if they're ever allowed to lend it a bit more than zero, they'll make a lot more money than they
make at the moment. And then we also own some companies in Japan which trade at a discount book value and which are under pressure to reorganize themselves, basically to sell some of the cross shareholdings that they've had and buy back shares, and that would lead to very sharp increases in the share prices.
And I to interrupt you to ask you what would make that happen, because we have been telling that story for fifteen years, maybe longer, maybe twenty years. We've been telling that story and Ryan Cross shareholding blah blah blah blah blah. Yeah, and sometimes it happens, but it hasn't happened in the volume that maybe you and I might have expected. So what's going to make it happen now?
So the good news here is that for the first time in history, yes, the new chairman of the Tokyo Stock Exchange has told them all to do this in public, okay,
And that's what makes a difference. So if you look up the nicky newspaper headlines for last week, the new chairman of the Tokyo Stock Exchanger sent out a letter to over a thousand companies that trade below book value, and they've said, all of you should make a public announcement of how you're going to reorganize yourself so that you don't trade blow book value in future.
Now you can refuse, you can lose face, which is not big into bad.
But the pressure on them has never been greater, and this is quite a big change. The other thing I'd say is there were a number of activist investors who forced this change last year, and they weren't pushed away or frowned on. You know, the establishment in Japan can
see that they need to make some changes. Whereas there was a wave of this around the time Arbey came in in twenty twelve, twenty thirteen, twenty fourteen, a few raiders turned up from America, particularly in private equity, and tried to do this, and they were pretty much told to go away. And you know, the establishment just said, we don't want to, we don't want Japanese business run in these dreadful American ways.
And they had some points, you know, because they don't you know.
They're not going to approve of takeovers to lay off workers or anything like that. But the pressure at the moment is just to improve governance, just to improved shareholder value.
And the number of stocks you.
Can buy on that is smaller than it was because some of them have already worked. So we've got a few of those.
Can you give us an example of definitely stockholder's trading below book? Very we like examples?
Yes, yes, Well, there's a company called top Hand, which used to be called top Hand Printing, and it owns lots of lots of controlling stakes in.
Very very good subsidiary companies.
But if it just sold those stakes and used its cash, it could cancel half its shares and you'd end up with the same business for half the number of shares, so the share price would double. It's quite simple, and the board has always known this, but they found life very comfortable having a wildly over capitalized, very rich business which which you know, chugs along. So it's the interesting thing here is that there were there are two printing
businesses in Japan. The other one is called Di Nipon Printing, and the other one's already done this over the last six months and it shares are rap I think, so all that they've got to do is not be the only one left who hasn't done the right thing.
That's it.
It's and it's core business is solid. So if it sells off all these subsidiary steaks.
Exactly, and you don't want to buy something where the core business isn't solid. Yeah, it's it's a solid, low growth business.
But I thought you only approved of high growth businesses. Literally just told us a matter of three minutes ago.
No, what I said to you was that I approve of high growth businesses if you can find cheap ones, right, but during a period of higher inflation, you need a balance sportfodio which has some more modest grown companies on very low, very very low ratings like this, and also balanced with some higher growth businesses which are still not bite your hand off cheap. I mean, I'm not going to tell you that the well known growth businesses in the world.
To bite your hand off cheap. I don't think they are.
So you need some balance in the portfolio. I think that that's key now that interest rates are higher.
Okay, So if we're looking for cheap and relatively low growth, what about the UK?
Well, interestingly so on my list of average multiples of stock markets, which is not a good way of doing valuation, as you know, because each stock market the average multiple is more about the mix than about the stocks in it. But yeah, so the S and P index in America, as I said, is seventeen times earnings, Japan fifteen times earnings. Japan used to be more expensive even on just earnings multiple,
so it's no longer as expensive as it was. And then yes, bottom of the class come the UK ten times earnings and Hong Kong, which has got problems on.
Nine times earnings.
And the reason for that in the UK, as you know, is the biggest stocks in our index are banks and oil companies, mining companies, and they all tend to trade on very low earnings multiples because the earnings go down from time to time.
So when the oil price goes down, you.
Know, anyone who buys BP on six times earnings needs to check whether that's six times earnings when the oil price is very high, because then when the earnings oil price goes down, of course it won't be on six times earnings.
It'll be on twelve times earnings.
So you know, so these pee things move around in cycnical sectors. And the trouble with the Hong Kong market and the UK market is they've got very large, very good, but very cyclical stocks in it, so the comparisons are not entirely fair. All the same, I have more UK stocks now than I've had for years, I have less Americans waiting than I've had for years, and I have more European waiting.
That I have for years.
So yeah, I don't think America is full of cheap shares, and that's quite a big change from the way in which on my way of doing valuation is the way in which the market looked between twenty ten and i'd say twenty twenty, most of the time we could find American businesses which were not a.
Lot more expensive than the rest of the world.
Now we can't, Okay, so let's go back to talking about some of the big themes that you're thinking about at the moment. So we've talked a bit about Asia as a theme, and that's partly on valuation grounds and partly on growth grounds.
Yeah, China reopening will be the really big economic news this year.
But you're not actively invested in Chinese stocks themselves.
You don't need to be.
So the way we we invest in China were actually considerably more exposed to the Chinese economy than the index. But we do it through investments in other parts of the world, most particularly in luxury goods companies which quoted
in Europe. So the big biggest holdings in the founder companies like Louis v Wuito, which managed to sell yet again, managed to tell well, I think twenty percent more handbags last year than the year before, and they managed double digits the year before the year before that.
I mean, it's an astonishing The.
Mystery is how many hands how many handbags do you have?
Simon, Yeah, I'm probably I'm probably not the target audience, Marrin, So I think you could probably help me on this one.
I have quite a lot of airbags, but none very none, very expensive. I just don't think I can bring myself to pay that kind of money for a handbag. Well, and it's it's an endless mystery to me, the whole thing.
It's a mystery to me. But I'm very happy shareholder. We've owned these shares. This has been the biggest holding of the fund since we launched the unit Trust twelve years ago. It's the biggest profit we've made over that period. So luxury goods sales are one of the classic ways of getting exposure to China. We've just bought some shares an estate Lorder, which again the Chinese by a lot of cosmetics from estay Lord in particular, more than from.
Loreal w Why why why why why Stayloaders. There are so many amazing Asian makeup and skincare brands. The Koreans are brilliant at their stuff. Why a Staylorder? Are you the wrong person to ask? Can't you?
I'm possibly.
All you know is that they do not why they.
I look at the data and I noticed how fast the sales stopped, I mean literally stopped overnight when zero COVID policy was brought in. And it's particularly these are sales inland, so it's it's not actually just Chinese people traveling to the rest of the world.
When they go.
Down to Hainan Island, they buy a lot down there, and they buy very high end stuff, and no doubt they find that the estate order cosmetics particularly work for them just as much as they particularly like Hermes and Louis Wheat are handbags, and they don't you know, they won't pay up so much for other brands.
So I just trust the data.
And you know how they say you'd only invest in things you understand Simon.
Yeah, well that would leave me with a very narrow portfolio.
What other ways if have you got to get into investing in China without actually investing in China, without taking the political risk which comes with being in China itself.
Well, the other interesting area has been a lot of European companies, major German companies are very successful in China. They're more successful in their investments in China, i'd say in proportion than some of them have been in America. And in the autumn last year, when everyone thought the world was going to come to an end and we're going to run out of gas and we'd have to turn.
The lights off.
In Europe, a lot of these European fantastic European market leaders, world leaders, we're trading on the lust ratings i've ever seen them on. So we bought shares in companies like Schneider and Seamens, which will benefit from American growth more than Chinese growth, but all the same, they've all got good Chinese businesses inside them. And then on top of that, American healthcare companies, particularly diagnostic companies, make a decent amount
of money setting high tech equipment to China. Now, of course, in the middle of all this, we've got to be very careful that you don't invest in a business which could get caught between this increasing trade spat between America and China. But at the moment there's no sign that
the Chinese. The Chinese may want to argue about semiconductors, and I understand their point of view here because they're sort of being locked out, but that doesn't mean to say they're going to stop buying American diagnostic equipment or insulin made by Novo Nordisk. I mean they're still open to trade with the world, particularly in areas where you
know your company makes stuff that they want. Making sure that you're investing mainly in businesses have got a really powerful market position like that is important quite outside the Chinese environment. This is about in a difficult world which will no doubt face some more problems in future.
What about India. Indian population overtaking the Chinese population, and for years we've been talking about India as about to break through, about to be that, you know, the fastest growing, greatest economy ever except and quite happened. But it feels like with everyone wanting possibly to shift some of their investments from China towards other developing countries that now might be India's time invested there.
We're not.
We do have licenses to invest there, and we've missed out. I mean, it was the best performing emerging market last year, so I can't claim it's been a good idea.
There are two troubles I've had with India.
Firstly, I find all of the best companies I find very very expensive. Indeed, there's a very large domestic investing public, and so that public can't take their money out of India easily and invested around the rest of the world. So that's probably one of the reasons why the shares tend to look expensive. And then secondly, if India does open up to trade more, it could always they'll always
be losers as well as winners. And so you know, everyone in the world keeps knocking on India's door saying, would you like to join this trade agreement that trade agreement?
Trade with us more?
But they've generally got a domestic industry that they know might be quite fragile if it was opened up, and you don't want to be invested in them.
Okay, not India, then other Asian economies that are interesting.
I think one thing.
I mean, I'm very underweight emerging markets at the moment, and I think it's important I just go back to what I said earlier about the total weight of debt in the world.
Being very very high.
Although I think that this is a perfect good time to invest in equities and to invest in very strong equities, I don't see any point in taking any risks you don't have to take because the trouble is, we've got this background of massive amounts of debt, massive amounts of government debt. We haven't got markets where central banks are supporting the market anymore because they're trying to stop doing this bond buying that they've been doing for fifteen years.
In some cases, like in Japan, they're running out of bonds to buy, so they have to stop at some point.
So the shock.
Absorbers in the system have gone away. And although at the moment I can see quite a rosy scenario for this year, the trouble is if anything bad did happen, and always something happens that you can't expect. Saint Putin got much rougher and in Ukraine and wasn't prepared to let this warfizzle out, or say that the next attempt by Opek to cut oil production really did take the oil price up again. Markets would fall quite sharply and
companies were find it quite difficult. So my policy at the moment is safety first, and I'm afraid that that just you know, if you can find a developed market company on a sensible rating which will which will grow nicely for you over the years, why go any further.
Okay, I think that's a good way of looking at though. I would say that your professor Napier is very keen on Asian equities at the moment, so maybe we'll come back to that with him another time. Now, there are few more things that I want to I want to ask you, But the first one is about he wrote.
He wrote, he wrote the book about the shape gradation crisis and made me read it.
He did it. We all read it, and extremely good. It is too highly recommended, by the way listeners have had. Anything written by Red Napier is highly recommended. I wanted to ask you about ESG. Now, we've talked about ESG in the past and ESG overlays on portfolios, et cetera,
et cetera. But the last couple of years, and the last year in particular, have shown us many of the weaknesses of the approach that lots of fund managers have taken to ESG, and things that were not considered to be ESG friendly only eighteen months ago are now considered to be very very ESG friendly. I give you defense, etc. And you can even now and I do make an
excellent argument for fossil fuels being ESG friendly. Well, I mean, if you would take the S seriously and you'd like people's living standards to be maintained, then obviously you should consider the fossil fuel industry as part of that. Anyway, moving on from that, because I hate mail by the way to usual address, Simon. Have you changed your approach to ESG over the last couple of years or do you think that there are changes that people should be taking into account.
I'm delighted to say we haven't changed our approach at all, because it was perfect. Because we've thought about these things quite seriously, and we've seen the ESG agenda go from not taking it seriously to coming up with a sort of prescription based, bizarre, totally impractical tick list and now perhaps in ways back to where we started.
So the ESG score on our funds when all.
This first started about five years ago, came through and it turned out that we were top decile.
I think, amongst all funds, and we.
Just said, oh, that's interesting. We've never looked at it that way. But of course, we don't invest in bad businesses that pollute the planet because they're bad, and why would we. And then amazingly as you say, a couple of years ago, our ratings started going down because we own things like copper mines that you need in order to do the energy transition.
You can't do it without copper. It's quite simple.
And yes, we own a gas company now in the Investment Trust, because the Western world needs secure sources of gas so it doesn't rely on Russia. And you know, getting hydrocarbon prices up for poor people is not an acceptable policy. It doesn't mean to say that and that zero is undoable. It's just you've got to be practical about how long it's going to take, how much it's going to cost, and make sure that voters go with you.
And so we think we've run a balance approach here. We have a large.
Amount of the fund invested in energy transition companies that will help energy transition.
We have a particular holding that I'm very proud of, which is.
Well plea hopeful for let's put it this way, which is Panasonic. Yes, again a Japanese company, but it's one of Tesla's biggest battery makers, and it's never managed to make much money out of this. But you can imagine with this massive bill that Biden's passed in America to encourage energy transition in general and more use of electric vehicles. Panasonic's got two of the biggest battery plants in America,
one of them joint venture with Tesla. They're going to be paid for making a lot more batteries and they're going to be a lot more profitable for it. And it trades on twelve times earnings. You know, you get a lot of company for your money. And of course the America American investors have looked through Wall Street for companies that will benefit from the Inflation Reduction Act, but most of them don't, you know, they have never looked at Panasonic. It's in Japan, you know, So you missed
this out. And then we balance it with companies like First Soda, which is the biggest soda panel industrial soda panel maker in America, which is a very expensive stock. It's probably the most expensive stock in the portfolio. But again, going back to what I was saying, energy transition will happen. I think people are getting closer to being realistic about the cost and the time scales. The time scales may not be what the scientists want, but they have to
be what the politics. I'm afraid and the business reality will allow.
Well, it also has to be a balance between the short term, the medium term, and the long term. You know, we can't plunge everybody into poverty in the shortened medium term for a constantly shifting long term target. As I say, hey, mail to the normal address, can I ask you, simon, have you got any investments tall in the upgrading of
electricity grids of the national grade for example? I mean, I'm currently obsessed with the fact that our national grid was put up, you know, one hundred of years ago with the idea of taking empower from a set number of large power stations, and now finds itself taking in power from tens of thousands of different smaller energy producers, be they off sure wind farms or you know, your
second cousin's solar panel on their roof, et cetera. And it makes it an incredibly fragile thing, which is also someone's pointing out to me the other day, the global national electricity grid is the largest thing that humankind has ever created, the biggest thing ever ever, and yet in most developed countries it's also horribly, horribly out of date
and in no way whatsoever fit for purpose. So this seems to me to be one of the greatest investment opportunities there is participating in the upgrade of this global out of date network. Anything in that I.
Couldn't agree with you more, I love that couldn't agree with you more so. Semensddly Enough, which I've mentioned already, is one of the biggest. It's one of the first companies you'll ring up if you want your grid mended an updated, and it's about a third of the businesses GID into that. And secondly, if you have lots of little wind farms around a grid and they produce wind in the middle of the night when nobody needs it, what do you need to store the electricity batteries? Thus
Panasonic again, so that's the combination you really need. In the investment trust, we also have a holding in a UK battery company called Gore Street, which is a investment trust which just owns battery storage in the UK and pays a six and a bit percent yield every year for helping manage the British grid to and it's also
been investing. It's brought some battery storage plants in America, in Texas actually, and also in Germany because again going back to the engineering reality of this, as you say, people have talked about grid grid improvements for at least twenty years, but it actually seems to be happening now.
Well, it has to happen now, I mean, it has to happen. It's the core part of the energy transition. Without full on grid upgrade, yep, everything else is pointless.
Yeah, I couldn't agree more so.
Yeah, I mean we have a nice exposure of that, and that covers that, you know, that covers two of the really big areas we've talked about. Emerging market consumers. We invest in We invest in energy transition. We invest in automation that I've talked to you about before, which you know, just inflation of course, particularly wage inflation, pushes people to invest more in robotics and plant automation, but also automations coming into other industries like agriculture, even surgery.
Robots are getting cleverer, smarter. And then the other big area we invest in this healthcare because I'm afraid the healthcare costs of the world are going to carry on being one of the main drivers of econ mis tax spending policy, certainly for the next twenty five years. And then a funny sort of way, the pandemic actually was a period which wasn't very stressful for the health service.
This may covers a shop for people, but of course most of us didn't go anywhere near a hospital for two years.
No. I did actually go near a couple of hospitals, and there's absolutely amazing how little was going on, absolutely nothing, nothing.
Well, you know, we were told stairway, We did stairway, and we saved a few people's lives, you know, the people who had to go.
Unfortunately, of course they did a very good job of saving.
But yeah, we're back now to the normal dynamic which fed spending in this area, or demand in this area of an aging population which expects top class treatment, and there are lots of very high quality companies one can invest in.
You know, Simon, I don't think there's an old person left in the UK who expects top quality treatment, Like top quality treatment, what do you think they actually expect? Yeah, exactly.
I don't know. I feel that people do expect it, and then.
Well then they've got a world of disappointment ahead, haven't they.
I think that I don't know.
I mean it's a different subject, but just on the investment side, the great thing is that there's a such a.
Long list of really high quality companies.
But in healthcare, I tend to avoid the drug companies because the drug companies businesses inventing cures for things that there aren't good cures for at the moment, which are often very rare diseases and where you need to spend a very large amount of money on a very small
number of patients to cure them. And I just think that the system won't be spending money on that because the money will be needed for old fashioned care, proven technology, old fashioned technology, a lot more diagnostics, a lot more medical equipment, hits and knees, you know, hearing aids, hips and knees.
I need knees. Someone give them your knees. Now, listen, what's your top healthcare holding?
So I think the best one for me on this at the moment, anyway, is the one I've probably mentioned today anyway. It's Sonova, which is one of the world's biggest hearing aid companies, and the world of people who need hearing aids because they're feeling a bit stressed on the on their personal account because the cost of living.
None of them upgraded, they're hearing it. Few of them upgraded their hearing aids last year, and they're all coming back to do it this year because everyone feels a bit more confident and people are going out more and the hearing aids keep getting better.
These are the teeny little digital.
Ones which need tuning up to your ear, but which you know, are a massive improvement on the old hearing aids, which were basically just loud speakers stuck in ero and these these shares. You know, there are three or four company is in the world that make the really good hearing aids, the many European companies, many most of them are based in the Benilux. And yeah, I mean that the trend at the moment seems to be that people.
Are going back to getting their hearing sorted.
And that's before you get all the people who've been on the tube with their EarPods in for the last twenty years.
Is that music?
Is that going to product the demand for hearing is? Do you think Apple is going to release a hearing aid product?
I don't think.
Come on, I mean it absolutely standard brilliant corporate policy to create a need for a product and then build the product something to work. You heard it here.
First they they are to get a hearing aid that can yeah, that can bluetooth.
I don't know. Perhaps hearing aids can't.
Bluetooth into your iPhone. I have no idea why not. But if they don't, now it probably won't be them. It'll be you know, snover who will make a hearing aid which has good bluetooth and whilst the other thing noise cancelation.
That'll be the thing. The noise cancelation is actually part of how hearing his work. Yes, sorry, go into this.
Yeah, we're going another tangent, tangent alert, tangent. Look, we've got calling into this. I always say post didn't be more than twenty five minutes or people get terribly bored. But you've been a bit longer than that, and I know they won't. We got bored for a second. So last question, Oh god, I said we were going to talk about the person taking over from you, the trust, you know what, We're not going to do that. They're going to have to read about that on the internet
at a later date. But here you are, you heading off into retirement. You can dig into that portfolio of yours at midwind and you can take one stock with you. Which one would it be? Oh?
I think, I think.
I think the best company for the future that I've got in the fund is Thermo Fisher, world's leading scientific equipment makers. One of the cleverest companies I've ever met, one of the best managed.
Not cheap, but who cares?
Okay, Simon, not cheap? Is that the right way to win? It'll do. Thank you so much joining us today, and I hope that we will talk again before you slide off. Actually maybe a little short interview at the end of the year, but thank you for joining us.
You're welcome.
Thanks for listening to this week's Marin Talks Money. We will be back next week. In the meantime, if you like our show, do please rate, review, and subscribe wherever you listen to your podcast. And I repeat the bit if you like our show. If you don't like our show, please do not mention it to anybody. This episode was hosted by me Maren Sumset Web. It was produced by Saasadi and Mohammad Faruk. Additional editing by Blake Maples. Special
thanks to Simon Edleston and to John Steppek. And finally, do not forget to sign up to John's daily newsletter, Money Distilled. The link is in this show notes. Do sign up. You definitely won't regret it.