John, Hello, morning, Melton. There's so much to talk about. I don't know where to start, and really importantly, so much to talk about in areas where you and I have just been right.
That's always the best idious to talk about. I feel.
I know, I know now you've written and we're not going to talk about this. I just want to write down a market so everyone knows that we were right. You've written about the Japanese equity market today, and you and I have been talking for a while about her. Japanese equity is farty, cheap, everything's changing. When I say well,
I mean it really a very long while. And finally they've broken through what our old friend Jonathan Allen mused to call the iron coffin lid, which means that the only way is up right, just say yes, because we're all going to talk about this. They can go and read Money Distilled and read all about it there. Your job is just to say yes, yes, excellent. The thing I really want to talk about today is the other thing that you and I have been writing about for
a long time. We've been writing about her. Nobody understands how widely spread read the tax burden is in the UK, so we read you and I how many years ago now we read an article I think in the New York Times about fourteen twenty fourteen, because we also have
good memories, which is important to rather. You have a good memory, and sometimes you remind me about stuff we've talked about in the past, and we've read this article which we thought was absolutely amazing because it explained the fluidity of income earning in the US and how over a lifetime people are sometimes in the bottom quintile of earning, sometimes in the top quintile of earning, often in the
middle quintiles, et cetera. But seventy six percent of people, according to the study, passed through the top quintile of income generation in the US at least once during a career. And you know what the top quintile income in the US is.
As you know, it's on my head.
No, luckily I do. Back when back when the article was written, it was was slightly lower, but it's now about to two hundred and sixty nine thousand dollars, or that was the number last year. So that mean seventy six percent of income tax paying workers in the US, at some point during a year earn around two hundred and seventy thousand dollars. Absolutely amazing and a great testament
to the meritocracy and fluidity of the US economy. Now, everybody thinks that that is not the case in the UK, right So when we had all this stuff up from the IFS this week explaining that in a couple of years, twenty percent of income tax paying workers in the UK would end up in the forty percent bracket, everyone went, oh,
my god, that's awful twenty percent of people. And you and I thought back, and we remembered that article that we'd read, and we thought, twenty percent people is the bottom band there, because in fact there'll be fluidity in the UK economy as well. Incomes are not static, particularly in the private sector. They move around the place all the time. You can sometimes be in a lower bracket, you can sometimes be in a higher bracket. Let's go back to the quintiles move around the place inside these
going to us. And what we didn't know though, is exactly what those numbers might look like in the UK. And now I'm handing out to you because one of our brilliant colleagues at Bloomberg pointed us to some ons data which gave us some clues.
Right, Yeah, So Conrad in the office very kindly dugout this particular port called income dynamics. I think is that the name of the report, and it's often I mean, it's nowhere on there is granular. I think that was an academic study that the US was referencing, and so
that I had actually gone through an entire lifetime. But even looking at just ten years, what this study found was that while people in the top quin title in twenty ten were more likely to stay there for the whole time, between twenty ten and twenty twenty, you still found just basically half of them weren't there by the time that the decade ended. You also found that more than half the people who started in the bottom quint title had then moved out of it by the time
that kind of decade ended. And in the middle there's virtually there was just a lot of moving about, so people were in the second and then the third, and then the fourth and vice versa. So the point isn't so much that, and I mean there are specific kind of statistics and money distilled from earlier this week, but the point is that, yes, there is a lot of income fluidity here too, and there might not be as
much as the US. In fact, I'd be astonished if there is as much as in the US, because obviously the US is the kind of kreme de la creme of meritocracy and kind of capitalist dynamic and all that sort of stuff. But it's very clear that, as you said, the idea that twenty percent of income tax payers will be paying forty percent tax is a very low bar estimate. And I would wager that the majority of work use as in more than half will pay forty percent income
tax at some point during their careers. And I think that the important thing about that is that it should make us think about this differently. I mean the one actually that I pick up on and I think we should discuss this another time, But we're always talking about who you know, maybe tax relief on pensions is skewed,
and two it should be done differently. But the thing is, if there are points in most people's careers where they are forty percent tax payers, those are also the times in their lives where they're going to be wanting to put away as much as possible for their pensions. So perhaps this idea kind of flattening the tax releaf and pensions, isn't such a good idea and not is it actually particularly fair, particularly in anyone who has yet to be benefit
from that tax relief. That's slightly separate issue.
Well, I think I just pick up that one quickly. Oh yeah, I obviously I agree with you on everything, and I particularly agree with you on this, and it's one of the main reasons why I feel that the annual allowance is the problem, that the lifetime allowance was
never the problem. The problem is the annual allowance because as soon as people get to a point, which as it turns out, more people than you think do, get to their few high earning years, those are the years when they're then told they're not allowed to contry be very much into a pension. And that's where the problem comes,
you know. So it's the whole system is set up with the belief that politicians have because most politicians cannot see be on the end of their own noses, they believe that everybody's income is like there's the same every year.
Because anyone who works in the public sector will, particularly as an MP, because you don't get promoted or demoted outside going in and out of the cabinet, right, their income, bar a little inflation adjustment, remains static year after year after year, and they make policies for that situation, not for the situation which these these numbers that we're looking at show most people on or in.
See.
I'll give you wyes.
Think that's an interesting point. The one thing I would say is I just query slightly whether they have that excuse, because I mean.
You're too nice to have I been too nice.
I mean, career politicians may have a sort of static income, but I mean, you know, every four years they run the risky getting thrown out in their backsides and then they don't have anything. And then also there's all the ones who you know, quite rightly in my view, kind
of make money on the side. So in a funny kind of I think they should be more used to, you know, ups and downs in their their annual income than so I'm not sure that they have the excuse that I could see if they want normal public sector workers, you know, because there's like pay grades and bands and all that sort of stuff, and it generally is kind of matter, you know, as long as you stay in work,
you go up the way. But with politicians, they have a much more volatile career path if they're at all I mean, if they're at all ambitious. So it just strikes me that actually, I'm not sure they have that excuse.
Well, they're just making crap then anyway, that was that was a sign. Where were you actually going with this conversation?
I have totally forgotten already, But no, I think it's it's this thing of well, actually, the other interesting about this politically is that I do think that people will start to notice because it's been popular to talk about taxing, you know, the rich and then throwing income at a certain level in as being the rich, and the more people who get hit by higher rate tax not to mention kind of horrendous kind of marginal tax rates as child benefits, withdrawing, etc. The less likely that charge is
to stick.
I mean.
One of the things that I thought was interested and quite clever about the way the IFS publicized this is they made the point that in the early nineteen nineties, virtually no nurse toll was paying forty percent tax, and by twenty twenty seven, some poate one in eight of them will be paying twenty percent. One in four teachers almost like I mean like well over our third to police officers.
Yeah, but that's at one static point. Yeah, exactly, Many many more of them will move through this rate over their careers. And that's the key thing. The point that we're desperately trying to get across to everybody is that it might be one in four policemen in two years if you if you take a static point, but it'll be many, many, many more of a career. So this explains why, and this is really important listen our politicians.
This explains why electorates are generally against the top rate of taxes going up, because they know that there's a very strong chance that they're going to pay that rate of tax at some point, and it's going to be in the one or two years when they suddenly go, oh wow, I'm really earning now. Someone else took everything.
Yeah, it's yeah. They should learn that and they're going. I mean the point thing that worries means they'll learn the wrong lesson and they'll decide to just shunt a load of tacks when it's something else and make our lives miserable that way. But yes, I think the focus
needs to fall on how do we make more money? Overall, how do we grow the pie again rather than sitting kind of you don't threaten about saving bets here and there and cutting this and cutting that, and all of that kind of goes back to we should have a smaller state, et cetera, et cetera, regulation, you.
Know, and that we had horrible productivity numbers. Again today, focus on growing, focus on productivity read money to stilled by the way, because there's also some bits and bobs in there. There's a growing body of anecdotal evidence at least that people are virting with their feet and wealth creators are beginning to leave the UK for warmer climbs in every possible way. So that's very important. I just
want to leave you with these numbers again. We've told you them before, but in this podcast, but listen again. You think that in the UK the rich of the rich and the poorer the poor, But in this quintear data we've been looking at over the ten year period, nearly fifty percent of those in the top quartile at the beginning were not there at the end, and over sixty percent of those who are in the bottom quartile
at the beginning were not there at the end. The rich are not the rich and the poor are not the poor. There's a lot of fluidity in the UK, right John.
Yep, it's not all lost, and you know.
Maybe the US is better, but I wonder I'd really like to have proper data on this right.
Hopefully somebody out there listening right now is the start offices or a university somewhere. You might have this data. You might be looking at it.
Send it to us, Send it to us. Put your political prejudices aside one at universities, send us the data. Welcome to Merendalk's Money, the podcast in which people who know the markets explain the markets. I'm Meren sum Set where this week a conversation with Sharon Bell, Managing director and senior European equity strategist at Goldman Sachs. Yes, our first guest from Goldman Sachs. Sharon, thank you so much for joining us today. We hugely appreciate it.
Thank you, Thanks for in fighting me kind.
Of come now listen. I want I know, I know that you're basically one of those rare guests we have who knows absolutely everything. And you know, I could ask you about any market around the world and you'd know the answer. So what I'd like to do, if you don't mind, and I think that their listeners will love this, is just start by saying, could you give us an overview the huge question right an overview of global markets
at the moment? What is going on out there, what are the main dynamics bind market moves, and what should we be looking at.
I will tell you everything, But in some ways I think global markets is surprised people this year.
On the positive side, a lot of investors expected weaker returns this year. We've had pretty strong returns actually, especially in Europe, double digit returns for a lot of indices
already and we're not even halfway through the year. And the US market as well, especially the NASDAK, but the S and P five hundred as well up to year to date, so reasonably good returns on equities, and particularly given all the things that actually face interest rates have been rising, commodity prices have come down, growth has definitely slowed, orbit not in recession yet, so in some ways I would say the market's been quite resilient so far this year.
And then on top of all of that, we've had all the stress in the US banks with some bank failures, etc. And concerns about slowing a loan growth as well. But I guess the things that have really boosted the market and helped the market, especially in Europe, which is my focus is energy, is gas prices weren't as high as people feed worried about coming into this year.
They came down.
That's how the consumer, it's how governments as well, hell, because they promised to cushion the consumer from higher prices. Also, the contagion, the feared contagion from the bank stress in the US hasn't been as bad yet as feared.
Of course that could come.
But at the moment we've only seen a small tightening and credit conditions and a small fall in loan growth. So I'd say that markets have digested things relatively well. But our main concern for the equity market at the moment, particularly in the US, is that it's not cheap. It trades on a pe ratio of sort of eighteen to
nineteen times, that's about its twenty year average. And of course there is now another asset class out there which is quite attractive, offering you four or five percent yield, and that's short term rates.
Given where interest rates are now.
So I would say resilient, but a little bit mixed, and we do have and that returns will be low from here.
Yeah. So basically when you say resilient, what you mean is it's too resilient, it's scarily resilient. Something doesn't feel quite right. I mean, last year, we had this sense that we were going to revert to some kind of valuation norm and possibly you know, profit margins were going to revert to some beginning to revert some kind of historical norm as well, and that that was something that we'd see going through into this year. And some of
that didn't happen this year. Instead, we've seen a reversion back to the dynamic of the last few years, the prove twenty twenty two years, as opposed to a continuation of the dynamic of twenty twenty two. Very unexpected.
Yes, I'd say that's probably fair in a number of senses. One in the sense that great expectations have started to come down, so that twenty twenty two was very characterized by high inflation, inflation constantly surprising on the upside, economists had to let go of this idea that it was transient. It turned out that inflation was very sticky. Last year, our interest rates had to go up and were constantly
rising above people's expertsations. So while this year, I think a big boost equities in many ways has been the expectation that interest rates will be peaking.
We in fact, do you think that interest rates have peaked now in the US at the short end.
Where we differ, I think from the consensus is that we don't expect them to come down very rapidly, so we think rates will plateau for a period of time. But yes, you're right, it's been very resilient, and maybe overly resilient, not reflecting some of the risks out there, which is that the remainder of this year you'll like to see very slow grows. There's a risk of recession. It's not in our forecast, but there's certainly a risk of that. And there's also not much risk premium priced
into equities. I guess you would say, because the yould you can get another other assets is quite attractive relative to equity.
Okay, so let's just stick briefly with the interest rate inflation dynamics. So you're expecting that rates have pretty much plattered what peaked, shall we say, But are going to stay at this kind of level for a longer period than some others might think. Does that also suggests that you expect inflation to remain reasonably high in the short to medium term.
We do expect inflation to come down. Inflation has already come down from its peaks in most places to remain quite sticky and high in the UK, but in most places and the US inflation recently printed below five percent headline inflation. Core inflation has been coming down to so that is helpful for global economies because you won't need such heart interest rate rises if inflation is already starting
to normalize. The fact that energy prices and commodity prices have come down from their peaks as well, it's also helpful in.
Bringing down inflation. But there are some elements of inflation that are like to be sticky.
The service sector still looks very strong, and that's services consumption is a big part of economies in pretty much all Western economies. Also, wage growths, although it's come down off its peaks in the US, are still very high and in Europe there is often two year wage deals, so it took a wa Wages to pick up in Europe, member sort of a year org. Also, people were constantly asking why aren't German wages picking up more? But I think that's largely because the two year deals. You're starting
to see those come through now. Also, labor markets are very tight still. We keep hearing about this, and pretty much every country labor markets are tight, and again that's going to be higher wages.
Higher wages feeds into core inflation.
So for those reasons, we think inflation will come down, but it's not going to come down rapidly in the way that it would have done before because of this tight labor market.
It's interesting, I mean, wages, fast rising wages seem to be the major worry. I mean, in some sense, of course, there's not a worry. If wonderful, If people can keep their real incomes constant, right, or even if real wages don't go up a little, possibly even significantly, that's a good thing in general. But of course it's very bad for inflation. And one of the things that people keep telling me is that again this rising wages is transient, that it's a one off that will get high rises
that this year, but then that'll be that. But I keep looking even thinking, well, hang on, a take you know, after many, many years of people not demanding high wage rises because they haven't seen high levels of inflation, they now understand the inflation dynamic and see what happens when inflation is high and erodes their real learnings, etc. So it seems to me that there's been a bit of a sea change in the way that labor and the unions approach wage increases, and that this could easily carry
on for many years from here. Them say inflation settles that four percent as opposed to two percent, which seems quite likely, right, or that it's volatile around four percent, why would the unions and workers in general not demand with rises next year of another five six seven percent. I mean, private sector wages are running at what about seven percent at the moment. It's hard for me to see why that wouldn't continue next year.
Yeah, I understand. I have a lot of sympathy with that view.
I think that real wages have deteriorated over time. Even nominal wages have been reading and good in the last couple of years, and then for a long time, medium wages in real terms haven't really increased. So I think this is a bit of a fight back by workers and unions in particular to regain some of that income over time. Company margins are quite high, so they could try and push for higher wages workers take a little bit more of the share of the overall pie of
the economy. And I think that the other thing which is the cause allowing allowing this is the tightness of the labor market. And I think there's a few potential reasons for why the labor market is so tight, but you see it in many different regions, and I do think there's an element of different things going on here.
One of them is just's cyclically quite tight, but also I wonder if it's structurally a bit more type now given declining working auge populations, not necessarily declining overall populations, but declining working out population.
In Europe, we're seeing.
Population declines of half percent to one percent a year in terms of working age population that's quite large accumulates very very quickly, so that decline in working as population means those workers now have potentially more power.
And then another trend is that in the.
Last couple of decades, companies either moved their workforce to the emerging world, to China in particular, where wages were cheaper. Wages have gone up in those places now, so slightly less obvious move. But also there are concerns about moving your labor force to those areas, given geopolitical risk, given what's happened with Russia, given that the ESG dynamics as well, wanting to bring your supply chain back home to your region, given political policies as well.
The Inflation Production Act in the US has got.
An element of local supply, and so has the Green Deal in Europe as well, I got an element of local supply.
So there's a couple of things going on.
Policies trying to support bringing labor back into some particular region. The labor forces out a shrinking a little bit, so I think for all those reasons, you're starting to see labor looking to regain a little bit more of the pie.
So I do have sympathy with that view.
Yes, okay, so inflation could be slightly more sticky than many people think for quite a few years to come on that basis. Okay, So inside all this, as you know, there's one more thing I want to talk about before we go to markets that got more specific markets. You mentioned profit margins being consistently high, and that there's space
in there for wage increases. But one of the things that we have been expecting, or many economists have been expecting for years, is some kind of reversion to the mean of profit margins, and particularly US profit margins, and it simply hasn't happened. And even you know, last year and this year, when we're seeing inflation coming through, when we're seeing these wage rises, and do you think, well, surely now, surely now profit margins will start to shrink, But no, what is going on there?
You know? I think profit margins did come down last year, even for those really big companies, the FANG companies, the top five, also US big tech companies. Margins have started to come down for these companies. So from very very high levels, margins have come down in the US and a tiny bit in Europe as well.
Estimates have started to come down.
And I think that's a combination of things, but sort of rising costs certainly one of them.
But margins are still pretty high.
I agree, And when I say they've come down, it's quite small versus the games that margins have made in the last twenty or so years. And our US strategus
have recently wrote a paper on this. Most of the games in the last twenty years or so have been in what they call costs of goods sold, so that is you're either squeezing your suppliers, we were just getting cheaper raw materials globally, and it is difficult to see that sort of constantly cheaper global raw materials persisting when we know that there hasn't been a lot of investment in recent years into commodities and things like that, which
makes those markets very roadlind other reasons why you've had higher margins have been lower taxes. That doesn't seem likely at the moment given government indebtedness globally. Number all the tax cuts that Trump first put in when he came into power, and that definitely boosted s and p margins. And then another thing has been interest costs coming down constantly because you always borrowed at lower and lower rates, and that's in reversal now.
So it may not be a really sharpfaul, but I do think that you will start to.
See margins certainly not expand in the way that they did over the last decade.
Okay, so it certainly feels like a turning point.
Yes, it's certainly going to be a very different cycle this next one than it last.
Okay, that doesn't sound great for exit markets.
Now, and again this comes back to this point of equities levitating a little bit this year at quite high levels. I've described it as resilient in the face of starring economic growth, a sort of pattern of potential for margins which isn't so strong this next cycle, and another competing asset class, which is which is casual bonds, which now offer your better yield. Having said that, equities do have some factors which I understand which would kind of explain
a little bit their resilience. I think that you have got in the biggest cap stocks in equities in.
The US, You've got the tech companies.
They're seen as the developers the gainers from artificial intelligence, which is a big new technology wave. Obviously that's going to influence economies and markets over this next decade. So that's that's going to be crutal for those stocks, and
they are a big part of the market cap. I also think with interest rates peaking, so we think the FED has got to the peak in its cycle, and even though we don't expect a sharp cutting interest rates we're no longer interest rates rising, and that's helpful for these long duration companies, these tech companies in particular. And then in Europe you've got we call them the granolas.
The biggest companies in Europe are really healthcare companies, brand and consumer goods companies, some of the big tech companies in Europe. These are by far the largest in terms of market cap. And these companies, they I think they will benefit in the next few years from trends like aging populations are going to help healthcare companies. AI will help healthcare companies as well. Some of the tech companies
will benefit from AI. Brand and consumer goods is extremely strong, so I think, and protect their margins even in higher inflation environments. So some of the what's in the markets, I guess you could say what the markets are made up of?
Since this environment.
Okay, interesting, Let's go back to commodities, because you mentioned when we were talking about inflation that it seems unlike actually that will continue to see what we saw until a few years ago, constantly falling commodity prices exactly, so the cost of them for companies falling, falling, falling, And you mentioned those markets are much tighter. Now, is that an area where the ordinary retail investors should be invested?
Do you think so? Intercommodities directly or intel?
Not directly, I don't think that's a good idea, But in commodity related equities.
If you're invest in commodities directly, you've got the danger that suddenly you might certainly find it in your house. Yeah, Finns and oil turning off in your golden which may obviously good.
So yeah, I.
Probably wouldn't recommend direct investment in commodities, but I do think that it is one of the scarce resources going forward, and therefore some exposure to commodities is a good idea. And you can get that ya the equity market, because of course there are companies which are commodity producers in the equity market, so energy stocks or the mining companies for example.
And the UK is a brilliant place for that because you've got a great big miners, the reattended, b Top etc. Which pay you a fabulous yield while you said around waiting for commodity prices to go up.
Yeah, So those and those companies are doing two things with their cash at the moment. They are paying a difference, and they're buying by shares, but they're not really doing one thing but their cash, which is investing it in new quantity supply.
Investors aren't really paying for that at the moment, they're not key on them doing so.
And now that's partly for ESG reasons, partly for environmental reasons. You want see more of cash stid towards the companies of investing in renewable projects. Certainly true that big oil and big energy is as well investing in some lower carbon projects, so some incrementally going into that, but there isn't a lot going into traditional energy production or into other commodities like industrial metal investment.
So because of that, and these are quite long lead times.
Because of that, these markets are quite tight, probably going to mean higher prices this next cycle than the last one.
It's tricky and isn't it, though, Because if you want an environmentally friendly energy transition, you have to dig up and all a lot of metals together. You need those industrial metals, you need all those minerals, you need the rarer metals, etc.
Etc.
You know, and it might be nasty to dig copper up, but you can't have an energy transition without digging up an awful lot of copper.
Yeah, absolutely, I mean copper is needed for electrification, which in Europe is largely going for electrification as a way of producing pollution, and that's going to require lots of cables, lots of copper, lots of investment. That requires equipment, machinery, metals, et cetera.
So we will still need a lot in this next decade for that transition.
So there are some hideous conflicts there in the world of ESG aren't there That always off? But you need you need to be really dirty to get clean.
Maybe that's the case. I don't know.
I give that to you as a title for a note one day. Thank you for that.
Now.
The other thing we talked a little bit about the UK is we talked about the HP and and real Jinto etc. And the yields available. And one of the things that we talk about a lot on the podcast because it's incredibly irritating is the state of the UK market.
And you recently put out a note called UK in pursuit of the American Dream about the UK companies or desperate to shift their listening to the US so that they can get much higher valuations and of course the CEOs can be considerably better paid, because that's one of the big parts of moving to the US is that not just to your sholders get more money because you hope your rating goes up. But of course your your management can get paid as much as they like without
being constantly nagged by shaholders as they are here. So this is true, this is happening. Is there a way out for the UK?
So I think when you say it's true, it's happening, it is happening for a few companies. But I always think that if you're going too maybe you're listening, you do have to have a reason for maybe you're listening. So you need to be a company with a lot American footprint, for example, And there are to be fair lots of UK companies in that position, so that you know that mainly narrows your list of companies, but it's not really narrow. There are lots of companies in that position.
So I do think you or you have to be in an area where you believe that you can attract a lot more US investment. So if you're a domestic UK company or a company with a footprint which is more European then there is really less reason for listing in the US.
I think, look, it's it's a tricky one.
I do feel the main reason that UK and European companies because I don't think it's just a UK issue, but the main reason that European companies are on lower valuations in US companies is that there isn't a large domestic investor base in Europe.
If you look at the US.
Dock market, around eighteen to ninety percent of its own domestically by the big pension funds endownment funds, but also by individuals themselves.
You know, all the meme stocks and things like that.
They're generally US companies that people have wanted to hold directly. If you ask most people, they would know they've heard of the Dow and the S and P and those big indices in the US, whereas investment in Europe has seen as much more niche fewer people invest and it's a smaller share of household wealth. Households in Europe tend to invest more in housing, more in bonds, and more in cash deposits, so that has been.
A bit of a problem. Really Europe can't attract it all.
This point about the US's deeper capital markets or yes, but that's because there are lots more domestic investors and the UK in particular, I think has an issue it.
Didn't used to in the nineteen nineties.
We never talked about this, and the reason we never talked about it was that eighty five percent of the market in the mid nineteen nineties was owned domestically.
In the UK.
Now only around a third of the markets owned domestically in the UK, and that's because insurance and pension funds that were the big holders of UK equity having sellers in the last twenty or thirty years, and that means that there isn't really a domestic investor base which wants to buy UK listed.
Shares and they've sold for that. There are all sorts of reasons. It's about their decline of defined benefit pension schemes. It's about regulation that has driven them to be supposedly more diversified or into so course stay for assets like
government bonds and that kind of thing. So there've been all kinds of regulator changes that have shifted the way that the huge UK pension funds invest and it's a rather worrying when you think that you're pretty much everyone in work in the UK at the moment is inequity invested via their auto enrollment pension. But they're not really invested in the UK in the way that we like to think they should be. And this doesn't look like
it's going to turn around, does it. So domestic invested us still into a much smaller degree, but still net sellers of UK stocks.
Yeah, they are still net sellers.
They have less and less to sell because they're a smaller share of the UK market now. But I think that they're encouraging more domestic investment in public equity, would would encourage sort of high evaluations for public equity as well, and I think that there have been in the past or of ways when you had in the late eighties and nineties a lot of privatizations for example, people became
involved in those and wanted to invest in those. Insurance companies and pension funds as well did use to own a lot of UK equity, and I agree with you for regulation, asset match and reasons they.
Produced that weight.
But I do think a little bit more of an ecty culture in Europe and the UK will be helpful, and it's one of the reasons that you don't see such deep capital markets in Europe.
Might the cheapness of the UK equity market really began to attract external investors, so foreign investors and a net bias right over the UK again not only huge scale, but net bios and the discount of the US market KA market to the US market vast. And while everyone says, oh, well, that's about sectors and it's about as not having growth and Isabella's not being tech, etcetera, etcetera, I know that even when you adjust for that, the discount is still
pretty big. And we're beginning to see private equity bids forall for some of our companies, smaller ones in particular. So is there a chance that you just get to the point where the market is cheap enough that American investors in particular look at it and today, well, why are we invested here? Or we give invested in similar companies over there at half the price and we begin to see a wave of capital coming into the UK? Or is that high in this guy thinking, which I'm prone.
To definitely not, I actually think this has been happening and well continued to happen. So I have a lot of conversations with global investors that see that UK up as being relatively inexpensive. So I think in a way, this gap between the US and the UK, or the US and Europe overall, there are really only are four ways it can close.
It can either.
Close because you see global investors buying Europe and the UK sort of fun and flows as it were, and you have seen fun flows out of the US in recent years and into Europe over the last few months, particularly sort of the end of last year very early this year, so we have seen some of that fun flow move. Another way that it can close, as you mentioned, is acquisitions. So companies buying companies are private equity companies
buying public listed equity, which perhaps looks quite inexpensive. And again we have seen quite a lot of inward acquisitions into the UK in recent years, particularly smaller companies, not necessarily the high profile ones that make the news, but a lot of smaller companies.
That's another way the gap could close.
Another one we've talked about before is UK companies or European companies relisting in the US and trying to close the gap via that. Although I do think that will be relatively niche not not every company can or would want.
To do that.
And then the final way the gap could close is just that UK companies say we're too cheap, we've got cash on our balank sheet, we will use that to buy our own equity. And you've seen buybacks rise considerably in the UK, particularly amongst financials, oil companies, mining companies, etc.
Which are on very low valuations.
So buying back your own shares has been another route to try to close this gap.
As recommended by Warren Buffett in his latest letter.
Yeah, I mean look, it's also going to help in terms of improving your earnings per share. If you've got fewer shares the same number of earnings, same amount of earnings, then you'll see a better earnings per share grows over time.
And the US market's.
Been fantastic at achieving that in recent years, and I think increasingly, particularly if you've got If you're in a more cycnical business like a commodity business for example financials, you don't necessarily want to commit to dividends every year, but when you have additional cash, buying back shares if your share price achieved makes a lot of sense.
Although there's always a slight worry that a lot of those buybacks are related to chief executive bonuses.
Yeah, I mean, I guess it's one way of boosting the share price and creating should return and a lot of people would like to see more money in best did in growth, and I do think that's one area of the UK and the whole of Europe.
Is not keeping pace with the US, to be fair, and I do wonder.
I don't think this is necessarily the incentives placed on top management. I'm not quite sure of the reasons for it, but if you think about the US, there's a lot of incentive to on top management to do share prices by any short term means. They often have renumeration related to return on actuity or shareholder returns, which is quite short term. So, if anything, US companies should be quite short terms, but they tend not to be so much.
They invest a higher share of their cash vow from operations in what we would call growth capex, which is either capital expenditure open above depreciation or R and D.
SO US companies they spend.
About a third of their cash vow from operations on that gross investment, whereas European companies.
It's around a fifth.
So even in a place like the US where there's a lots will focus on the top managements, renumeration being related to share prices, etc. Even there, they've got quite a lot more full sight and they are looking and investing for growth.
Maybe we should stay invested in the US now, Sharon, With all these things that we've talked about, where do you think the most interesting parts of the market are for retail investors at the moment? So, you know, speak Japan has had a fabulous run so far this year.
Is that.
I know it's not quite your area, but maybe that is interesting. I know you've written recently about the luxury goods companies being very interesting. We've talked about commodities. We've talked about the UK and Europe relative to the US. But if you had to pick out a couple of areas that were particularly interesting to you and therefore should be interesting to ordinary investors right now, what do you think they would be?
Yeah, So, I think for ordinary investors there's a combination of lots of different assets you can invest in right now. Even cash and bonds provide you with some reasonable return, whereas if you don't the clock three or four years ago, you were getting certainly negative real returns in those if not zero nominal returns, so.
You didn't have a lot of opportunities.
So I think there's an opportunity for diversification, which is always important for retail investors. For all of us, we want to diversify. I don't want to put everything into one basket and take on too much risk. But if I'm looking with be in the UK equity, which I
don't think is particularly expensive at the moment. I mentioned right at the outset that US equity looks quite expensive on eighteen or nineteen times PE, the UK market is on ten or eleven, and some of the cheapest areas are financials and commodities.
So as a kind of.
Longer term, medium, longer term view on these areas being undersupplied, particularly commodities, and being relatively inexpensive, and the companies having options like buying back their own shares or paying additional dividends, that looks like a reasonable area. But having said that, I would have a bit of a bar bow strategy. We're going for some of this cheaper stuff that looks potentially undersupplied, but also some of the newer growth that
areas look interesting. Anything that looks like it would likely gain from productivity improvements from AI for example, bits of healthcare, luxury goods, tech all look reasonable as well.
From the medium term for investors, you won't get paid so much in the way of.
Dividends from those or buybacks, but you probably will have nice.
Longer term growth.
Yeah, okay, that's interesting. Now, final question, no warning for this bitcoin or gold gold for.
Me, No shadow of down are there.
I think bitcoin is highly volatile asset, very difficult to pin down in any way to sort of economic fundamentals. In comparison, gold I think provides you a nice little hedge against two risks that.
Are around there.
One is that we do go into a deeper down term and expected maybe there is a further banking stress causing loans to tighten.
Credit congits to Titan. Gold is attractive in that sense.
The other risk that's out there, and we talked about a lack of supply of commodities. We talked about maybe higher inflation because of that lack of commodity supply, but also higher wage growth. Higher inflation means you really want to own real assets and gold in a sense as a real asset as well, so I prefer gold on that basis.
Okay, brilliant.
Do you know.
I don't think I've had anybody yet He's chosen bitcoin spread my net wider. There's got to be someone out there. Sarah, thank you so much for joining us today. That was great fun. I hope we can talk against you.
Thank you, thanks for inviting me.
Thanks for listening to this week's Marin Talks Money. We will be back next week in the meantime. If you like our show, rate review, and subscribe wherever you listen to podcasts. This episode was hosted by Me, Marry and Sunset Web. It was produced by Some Society. Additional editing by Blake Maple's special thanks to Sharon Bell and of course as ever to John Steppe and of course our
weekly reminder designed up John's daily newsletter, Money Distilled. The link is in this show notes at the top of the podcast. John and I discussed all sorts of topics. You will find detail on all those things in those Money Distilled newsletters. Do not miss them.