Barclays Wealth Management & Investments

Hello.

Good evening.

Good evening.

Hello.

Thank you so much for coming along, for braving the weather.

For those of you in the room and for those on the virtual dial in, thank you so much for persevering with us.

We had to just wait till we could all make it in the room.

So, here we are, another Investment Circle event.

And for those of you that have attended our Investment Circle events before, you'll know that we do these quite routinely and we do them through various guises over lockdown, all virtually now.

It's brilliant that we've got so many people in the room, and of course lots of people on the webcast as well that couldn't make it.

And you're all very, very welcome.

So thank you for joining us.

Obviously, we are in incredibly challenging times, and when we think about the world environment, that is uppermost on most people's minds and moods at the moment.

But our job here today is to come at the environment from an investment angle.

So when we think about the world of investing right now, we're really finding ourselves in a new era.

So I really, when I look back, I couldn't imagine 2 or 3 years ago that we'd be talking about an era of ultra low.

back then, going from ultra low interest rates and inflation being a thing of the past.

We had now sort of central banks really having to grapple with inflationary pressures.

And whilst the rate of price increases do seem to have peaked somewhat, it doesn't look like that's going to translate anytime soon into falling interest rates.

So a challenging environment.

So we've seen interest in bonds and equities, bonds and gilts pick up among retail investors probably for the first time in quite a long time.

And you know, one of the things that we want to talk about this evening is just that interplay.

And if you've joined our events before, you'll know that when we talk about the investing environment, we always like to talk about both bonds and equities and asset classes.

It's not an either or.

So the key to any successful portfolio, in our humble opinion, is to have a multiasset class approach.

And that means diversifying, spreading your money and investing in different geographic areas but also asset types.

And of course, you know, we'll vary those weightings and exposures depending on the environment that we're in.

And this is one of the beauties of having a panel such as we have today who are expert in both macro, fixed income, equities, and of course everything between.

So, Will, our very own Head of Multi-asset Investing here at Barclays is going to guide us through a discussion with our esteemed panel.

And you'll be able to post questions, so you can post questions obviously for those in the room - live.

And we will have some roving mics.

But for those of you that are watching the event, you'll be able to type those in on your screen.

You'll also be able to access Vivox for those in the room that want to pose a question or download it if you're if also watching from home.

For those of you that want to download Vivox, it's just an app.

You can get it from the App Store, or you can use the QR code if you take the picture of it, you just need to tap in order to make it come to life.

And the code is 103859897.

So I'll be catching those questions and then posing them to the panel towards the end.

So, a little bit of tedious housekeeping before I hand over to Will, I just need to remind you that what we're talking about today is not personal investment advice.

Of course, everything we talk about, there'll be some links after that we can share.

And we have many of our wealth managers and investment team in the room and available afterwards for those on the line.

So please remember that this isn't personal advice.

And of course, although we're big advocates of investing, prices can go down as well as up.

So, whilst we have esteemed investors on this panel, of course past performance isn't always the guide to future performance.

But with that boring housekeeping over, I'm going to hand over to Will to take us through a discussion and I'll be monitoring for questions.

Thank you Nicky.

And actually, Vivox just you got me thinking.

I have got a bad experience with Vivox because early on during the pandemic, I was asked to give a speech about the economy to our branch colleagues.

And they were armed with Vivox and I was following the questions on it and someone's just written in, wow, this guy is boring.

When's he finished?

So yeah, please do all your abuse as you want.

I'll be ready for it.

Happily only Nicky can see it and I can't at this time.

But I've got a great panel, so you won't hear any more from me.

I'm not going to do introductions.

You guys are, you know, it was all in the invite you got.

Shamik's going to talk about the economy.

You've got Rosie who's going to talk about fixed income and many other things besides.

And then finally on the furthest end you've got Diana, who's sort of equities expert, broadly speaking, they can give you a bit more sense of their specific specialisms as we go through the debate.

You'll get a sense of that as we go through.

But rest assured, it sounds a little bit like when I leave the fridge door open.

But forgive me if that goes on.

But yes, through the course of the debate, you'll see sort of this.

These are specialists who are, you know, we're very lucky to be able to be on the same.

I'm very lucky to be on stage with.

Starting off, let's start with you Shamik.

And you're the one to sort of set the tone for us a little bit and sort of tell us a little bit, get the crystal ball out, the probabilistic crystal ball, let's say, and tell us a little bit about the world economy at the moment, because it continues for much of this year.

We were, you know, we came into the year all of those sort of tasked with watching the economy.

And it was a little bit, everyone seemed to be watching it through their fingers, you know, brace, brace, brace.

A recession was coming.

But there is still, as I see, no recession yet.

And actually, the latest read on the US consumer seems to be that they're very strong.

So, set the picture for us, tell us what's sort of going on a little bit - and then.

- Sure, I'll do my best.

And thanks for inviting me, by the way.

It's great to be here.

I'm a bit worried.

You've teed them up with the comment to make.

What I would say is we are.

It's difficult.

These are difficult times undoubtedly.

I'm not going to touch on the geopolitics because that's a huge subject in itself.

But the key economic issue globally remains inflation.

And I think short-term, we can't really definitively say we've kind of sorted that one out.

Yes, it's on its way down.

Yes, it looks like we've passed the peak.

Yes, in some countries it looks like it's coming down more quickly than we had been expecting earlier this year.

But I think it's.

we're still quite some way from declaring victory.

And I think fundamentally that's because we need to go back to the root causes of this inflation to understand why that is the case.

I think partly we've got into this inflationary situation because of what you might call bad luck, if that's the right word for it.

Obviously coming out of Covid was very disruptive, disrupted global supply chains, the price of goods went up, that kind of thing.

And then of course, we had the Russia Ukraine situation which pushed up energy prices.

All of that was stuff we couldn't necessarily have anticipated.

But I think a major contributor, not the whole story, but a major, major contributing factor was was also, frankly, the misdiagnosis of what the long term impact of Covid - would be on the economy.

- Yeah.

So.

And I'm not saying this with hindsight, we were saying this back in 2021, but I think there was there's certainly a case to be made that central banks were far too cautious for far too long.

They left interest rates too low for too long, left money being pumped into the system via QE for too long.

And that's because, you know, I'll give you an example, the OECD's forecast of US unemployment that they made at the beginning of 2022 for the end of 2023, i.e. now, was 11%.

It's actually four or below.

So that's the scale of the mistake that's been made.

And I think central banks since mid 2022 have been in major catch up mode.

I think they've, broadly speaking, done the right thing since, but I still think it's a little bit too early to say that we've done enough.

Now that's very much the message you're getting at the moment from most central banks and frankly, from fixed income markets.

My concern is that that last 1 or 2 percentage points of inflation may prove the trickiest to get down.

So that's why I say the short run outlook over the next year is a little bit.

I wouldn't be honest if I weren't saying that I was a little bit nervous about A, the prospect of interest rates going up a little bit further from here, and B, the prospect of that causing some kind of recession in the major economies over the next 6 to 12 months.

Interesting.

Thank you.

That's a great tee up, Shamik.

That gets us nicely into Rosie's bit.

So Rosie, you know, obviously we've heard a little bit from Shamik about Table Mountain and interest rates rather than the Matterhorn, to use a weird central bank analogy.

What does that all mean for your world of fixed income?

And maybe you can sort of start us from the basics.

Me particularly with regards to sort of your world.

Okay.

And again, thank you very much for having me.

It's lovely to be here tonight with everyone.

So, just to recap for everyone's benefit and what we're talking about when we're talking about bonds or fixed income, what we're talking about is effectively an IOU.

It's just a loan.

So an investor will lend some money to an institution that issues the bond, and that institution will pay that money back at a predefined time period.

And in between that, they will pay a coupon, which is your yield, your your interest rate effectively.

And these are tradable assets.

So they go up and down with price like any other tradable asset.

And one of the comments I quite frequently hear from our clients is that they find it a very complex, multi dimensional asset class and it's quite difficult to get a grip on.

So I try to boil it down into a couple of main factors that are going to move those prices around.

Because it is quite difficult.

It is multi dimensional.

And I was just thinking the other day that if you wanted to get exposure to, for example, Barclays as an issuer, if you want to buy the Barclays stock, you go to your platform of choice.

You type in Barclays, you get the share price, you buy the shares.

It's pretty clear what you're doing and how to do it.

If you want to get exposure to Barclays debt instruments, of which there are thousands, you can search them up and you might find 40 or 50 that are denominated in sterling alone, with different maturity dates, different coupons, and also different levels of the capital structure, which means that there are different places in the institution which gives them a different pecking order.

Should something go wrong with Barclays, which is clearly not going to be.

Yeah, not a personal recommendation and also not a forecast.

Nothing is wrong.

Not investment advice.

So.

Yeah.

So there are lots of different flavours of different.

of the same kind of similar risks.

So it is multi dimensional.

However I think it's worth boiling it down to two of the main determinants that can move prices around.

One is interest rates.

So as you know we've seen most of the developed markets ramping up interest rates very steeply very quickly.

That means that yields on bonds have gone up sharply.

And the other thing it's important to remember is with bonds yields and price move like a seesaw.

They go in the opposite direction.

So we've seen yields going up in terms of the interest rate moves and prices coming down.

So it's been a negative return period for bonds.

So that's the first thing that you need to be aware of when you're thinking about the price of these instruments.

The second thing is what we call credit risk.

So how likely is it that the institution you've lent your money to is going to pay you back and, crucially, pay you back on time?

So we would demand a kicker above that yield.

So the interest rate yield and a credit risk premium is a bit like an insurance policy really.

And the size of that depends on the credit worthiness of the environment you're in and your belief in terms of what you're buying.

So that's sort of trying to sort of scene set.

In terms of actually actually answering your question, which is what are we looking at.

So thank you.

A good starter.

Maybe if I just briefly outline what we're sort of seeing in terms of the shape of the yield curve.

So, by yield curve we mean if you were to plot a picture of a graph of the y axis, your interest rate of the bond.

And on the x axis the maturity date, you plot that in a yield curve in a normal environment, you would expect that to be upward sloping.

What we're seeing now in the UK and also in the US is we're seeing this weird sort of down, up, down situation, which is.

looks a bit odd, but basically what interest rates are telling us and what's priced into markets is that there is a probability of some interest rate cuts.

Probably they think around this time next year, either 1 or 2 interest rates cuts that are priced into the market.

So we see this down move and then a normally slope.

upward sloping yield curve.

And then you get out to sort of 30 years, 40 years maturity bonds.

And the yield curve starts coming down again, which is a bit strange because you would ordinarily assume that the longer you're going to lend this institution your money, the higher risk you've got.

So therefore the higher yield you would expect in return.

And then that's purely a technical demand supply argument.

There's structural reasons why insurance companies and pension funds and other institutions that have requirement for longer dated assets against longer dated liabilities would want that longer dated.

those longer dated assets.

So there's quite a lot going on.

And we will actively, as active portfolio managers, we will actively pick the right point in the curve for any particular view and any market duration we want to take advantage of.

That is super helpful, Rosie.

Thank you.

And I guess just pivoting on from that.

So there's quite a specific story being told by bond markets about the outlook in terms of how we can read, decompose, deconstruct the bond yield.

What does that mean in your world, Diana?

I mean, obviously higher interest rates is a discount rate.

So there's a valuation effect, but also there's the story that the bond market is telling.

How do you.

can equities dance to their own tune?

How does this factor in to your world of investing?

Or do you just ignore it all and get on?

-Wow.

Fantastic.

Great question.

-Several questions.

Thank you.

As you said, we are entering a period which is very changed to that we've seen in the last ten years.

The type of equity that we invest in is what we call growth equity.

What do we mean by that?

For us, growth equity is all about change and disruption.

Now, many people are saying that with rising interest rates and rising inflation, growth is dead.

I think that that's a very important assertion to challenge.

I'd actually go back to 2008 and 2009 and ask who was saying that now was the time to invest in growth?

We're somewhat seeing a little bit of rewriting of the history books.

I don't think anybody has ever said that now is the time to invest in growth.

For us, we're quite agnostic to the market.

Of course, it's incredibly important to look at the balance sheet, to look at how a company funds itself, to look at its competitive position.

Is it reinvesting to be able to continue to grow into the future?

Now, of course, there's going to be headwinds for companies in this rising rate, rising inflation environment, but we're not seeing any slowing down of disruption or change.

If anything, the world is seeking answers to some problems which are absolutely craving solutions.

One of the areas where we're seeing huge disruption and actually huge deflationary forces is health care.

This is an industry which is hugely expensive, inefficient, doesn't keep patients interests front and centre.

GDP.

20% of US GDP today goes into health care costs.

So companies that are driving change, that are innovating, that are taking costs out of the system, we think can continue to perform over the next 5 to 10 years.

But it does take a long-term outlook, and it takes optimism, and it also requires shielding yourself as much as possible from noise, short-termism and news, which tends to be pretty negative.

Of course.

That's perfect.

We also counsel avoiding the news at all possible.

It's often not.

it's often contrary to what will help you as an investor.

But that's interesting about the disruption point, because Shamik, you and I were talking about this a little bit beforehand of just some of the potential.

I mean, this is an odd thing to say, but some of the positive effects of higher real interest rates, inflation adjusted interest rates, in that to a certain extent, they may help cut away some of the dead or dying corporate flesh and make space for some.

And the old saying is, in order to create the new world, you need to destroy some of the old world to a certain extent.

Is that something you think about a little bit -with regards to real interest?

-Very much so.

And thanks for asking that question, because I fulfill the definition of an economist by being a real Jeremiah in my first about the next year or so.

But what I want to stress is that actually, I think the world that we're emerging into is, once we've got through this turmoil, if you like, is a much more rational and sensible world for investing than the world we've been in since 2008 to 2019.

And I think one of the reasons for that, and yes, I think we will end up in a world in which interest rates are somewhat higher than they were in that period.

But remember, that period was extremely unusual.

The other thing about economists is that we're all nerds.

So I spend half my time looking at charts that no one else would find interesting, but the one I do like looking at quite a lot at the moment is a chart put out by the Bank of England.

Shows 300 years of interest rates.

-Yes, yes.

-And.

there are better things to do with your time.

But honestly, this.

and what it shows you is really quite interesting.

That period between 2008 and 2019 is extraordinarily unusual.

That period in which interest rates were zero for the best part of 12 years, 13 years, absolutely has never been seen in the history, in the history of UK interest rates going back 300 years, there hasn't even been one year where they were zero.

So in a way, you know, we should be welcoming the fact that even if interest rates do come down to a slightly higher level than we were used to, that's the more normal world.

That's the rational world, that's the world that investors should embrace.

Because frankly, investment managers can do their job more effectively.

One other thing I'd like to say about.

To come back, to come to your creative destruction point is that, yes, higher real interest rates.

Frankly, what that means is that any company whose business model is based on the assumption that interest rates are going to be low forever.

Any company that's frankly overleveraged in order to keep its bottom line going is going to find the new world much more.

much tougher.

By contrast, companies that are, you know, looking forward to embracing change.

And the change I'm particularly thinking about is AI, which I think could be hugely productivity enhancing in the next few years.

Any company that's positioned to do that and is therefore going to return cash flow to the investor in the form of future earnings and future profits, those companies are going to do very well, it seems to me.

And therefore, while some people look at a high interest rate world and go, oh my God, isn't that a bit scary?

Actually, you know, if they settle down at 3 or 4% somewhere like that, I think that's a much better world for investment managers to pick out those very companies that are likely to perform on the basis of their cash flow and where essentially real interest rates have done the job of weeding out the ones that are essentially based on leverage.

Interesting.

I think there was an even worse one, there was a paper.

worse, I say worse is better.

Eight Centuries of Interest Rates by Paul Schmelzing.

Yeah, it's not going to outsell Jack Reacher in the airports, is it.

But yeah, no, it's a very good one.

So Shamik talked there, Rosie, about about sort of rational and sensible.

And I guess what we're seeing from a lot, like the sort of the collection of treasured clients here, there's been a lot more interest in bond markets now than there has been in some time, almost as a standalone asset a lot of the time.

And I'm sure you're feeling the same.

So what are some of the points to think about?

And you've given us a nice kind of introduction to the world of fixed income, but what are some of the highlights for you in terms of why people should be considering this space?

When I talk to clients, they quite often are looking for three things when they're going into an allocation into fixed income.

One of the aspects that they're looking for is a level of income, as you would expect, given it's called fixed income, included in the name.

But they're looking to generate decent income source for their portfolio.

And because we've seen this depreciation in the value of the fixed interest securities, fixed income securities, we've seen yields coming up, that income level is now very enticing.

And actually the yield on.

it depends how you measure it and what which universe you're looking at.

But on the whole, fixed income yields are now higher than equity dividend yields.

So that is quite an interesting prospect for a lot of our clients that are thinking about fixed income investments.

So income is the first thing.

Safety is the second thing.

It's still perceived to be and is generally a lower volatile asset class.

We've obviously seen some volatility recently.

But on the whole in the longer run it's a less volatile asset class.

And the third thing is diversification.

So for clients of ours that are looking at mixed asset portfolios, having some fixed income in the mix is generally a good thing to do.

Now, I know there's been some changes in correlations recently, and we've seen particularly in 2022, but also in recent weeks, we've seen some positively correlated moves because of these extreme forces at play in financial markets.

But again, on the whole, if we're looking at the medium to longer-term investment horizon, clients do like to see an element of diversification coming from fixed income markets.

So those, I think are the three things that we get most conversations about.

And Diana, just getting you into this.

So, you know, Shamik talked a little bit about technology and we've talked about sort of interest rates.

What are the things that at the moment you're thinking about in the most excited way within your sector?

What are the areas that you're super interested in in terms of sort of growth prospects, let's say?

Yeah, I just like to pick up on one of your points around more rational environment that we're entering.

And I absolutely echo that.

I think this is such an attractive time to be a stock picker.

For the last ten years, so many, many companies have relied on essentially corporate Botox, and they have been gorging on very, very cheap debt.

And actually they've built business models that are really based on nothing and pretty unsustainable.

So actually, this is the time when proper stock picking can really identify those companies that are able to cement those competitive advantages.

And really, it's a time to separate the wheat from the chaff.

In terms of the areas that we are finding particularly interesting, it's really around the convergence of technology into all of our lives today.

AI, of course, is a particularly interesting theme.

One thing, though, that I would caution is being cognisant of the reality and being conscious of the hype cycle.

There was an interesting statistic from last quarter's earnings cycle.

I think around 40% of US companies mentioned AI in their webcast, but actually only around 16% reported on it.

So there's a lot of hype around this.

And again, it comes back to patient diligence stock picking.

But we are seeing it transform absolutely everything.

If I go back to health care again, Nvidia signed a collaboration with a drug discovery company that we invest in.

The week subsequent to that collaboration, the drug company were able to analyse the most inordinate amount of data that they said would have taken them 100,000 years to do prior to using AI.

So it is just phenomenal the progress that we are seeing and we're beginning to see ramifications of this across all aspects of life.

That's amazing.

And just a follow up question.

So all of you guys work for big firms with lots of resources to sort of deploy.

But in those situations you talk about Diana, how do you sort of deploy analytical resources to particular themes or companies or sectors?

How do you sort of get to the bottom of a valuation?

Because obviously, as you're talking about there, you know, if it is a time for stock pickers and sort of return to, you know, more alpha or, return to research how do you deploy that research?

So we have a big team of investors.

We've got about 170 investors, most of them based in Edinburgh.

There's a couple of elements to this.

I think that firstly, you have to recruit the right people, hiring people from the world of finance who have all studied the same books, who have typically studied the CFA, is probably going to lead you to think like the rest of the market.

So for us, we think that it's important to hire anthropologists, musicians, psychologists, doctors, people who are going to think about big challenges in a very different way.

But we don't just operate in isolation.

Now, you're very unlikely to see a Bloomberg terminal when you go to our office, nor are you likely to see any broker research.

Now, I'm sure some of it is absolutely fantastic, but everybody is reading the same thing, and it is really hard to get differentiated insight when you're reading exactly the same thing as everybody else.

So today we've got, I think, over 100 external collaborations and they're not with the world of finance.

These will be academics.

These will be with people who are studying PhDs in deep learning or the future of food.

We speak to futurologists.

So that's how we tap into what the world is going to look like in the next 5 to 10 years.

It is really hard today to think so optimistically about the future.

We also very quickly have a very strict process in place when we're talking about stocks.

The first 30 minutes of any discussion has to be positive.

If you say but or what about, then you're thrown out of the room immediately.

And you'd be surprised, we've been doing this for a hundred years now.

There are still people being thrown out of the room, so it's about retraining your mindset to think differently.

Pick the economists straight out, that's it.

I wouldn't last a minute either.

Yeah.

No chance.

And yeah.

So Rosie, that's just talking about that resource point again.

You know obviously a lot of particularly in credit what you talked about there is like getting a degree of safety and understanding the credit risks you're taking.

Quite often credit managers are just buying lots and lots and lots to diversify risk.

But what are the processes where you have to get comfortable with how you're lending to a company.

Yeah.

So, similarly in our organisation we have a lot of research analysts.

We have about 150 looking at companies across the globe on lots of different sectors and lots of different geographies.

And they're looking at it from an equity perspective and also from a fixed income perspective.

So they see both sides of the balance sheet.

And one of the things that we find quite helpful is that we go out to these individuals every month and we survey them, we ask them a load of questions.

And the reason we do this is so that we can try to find that middle ground of information that perhaps isn't being covered by the individual bottom up research on the company and the top down research on the macroeconomic side.

But we can help collate that bottom up information on company-by-company basis to perhaps be a bit more of a leading indicator to where that big picture macroeconomic story is going.

So, for example, when you get data releases on a group of companies, typically the data, well, by the time the data is collated and released, it's out of date anyway.

And it's an aggregate of an index or an aggregate of a particular area that you may or may not be representative of where you're investing.

When we talk to our individual analysts and we get them to complete these surveys, it is an accurate reflection of the companies that we're involved in and we're invested in.

But also we can ask forward-looking questions.

And I'll give you an example of one that was quite useful a few months ago or about six months ago, when we asked our analysts to rate how the management of the companies they're invested in, were thinking about recession.

Were they managing and planning their companies at a recession as a central case scenario, or were they just sort of saying, well, it might happen, it's on the back burner, it's a tail risk.

But really we're looking at a slowdown.

And the overwhelming response was, we're not planning for a recession.

We're planning for a slowdown, particularly in the US.

And at the time, interest rate markets were looking at, I think maybe we had maybe four cuts priced at, I'm going to say about six months ago, something like that.

So we had a difference of opinion.

The interest rate markets were pricing for recession.

And the bottom up story that we were getting from our analysts was not that.

Now with these, you can always argue it both ways.

You know, you can always say, well, clearly the company management don't know what they're doing or, you know, but I think the most important thing with all of this is that our investment teams get, have the ability to use lots of different tools to see the investment landscape through lots of different lenses.

And then with that information, they can make informed decisions and then actively manage the portfolio around those decisions.

Really interesting.

Shamik, I'm going to come to you to something different, because I want to avoid getting in trouble myself by getting asked this question, maybe within the later.

So what about one of the big kind of incoming asteroids at the moment seems to be US elections.

The options are interesting, let's say.

How do you factor that you run a team of economists around the world.

You've got all sorts of stuff.

And maybe not just US elections.

You can think about Chinese politics, but the political environment in general.

How do you factor that in?

How do you brief your guys on how to think about these kind of big, complicated events?

Yeah, I mean, the first thing is to be, I think, to be intellectually honest and say there's a lot of uncertainty out there.

We don't know frankly.

There's a lot that we're having to sort of kind of, you know, sort of feel about in the dark about.

The way we deal with that technically is not to rely on zero point forecasts.

We do.

What we do is tell stories, really different narratives for how the world economy and markets might evolve.

We tell the people who are interested in listening to us what we think are the most likely.

We attach probabilities to them.

But the key thing about these stories are they tend to be, first of all, mutually exclusive, quite distinct stories about how the world might evolve.

And secondly, they're internally consistent.

We make sure they're internally consistent from an economic point of view then.

And then we can use some sophisticated stats to put them together.

And we get interesting distributional forecasts, which tell you a lot about the the risks associated with different types of investment as well as the return.

Now what's interesting, I mean, BNY Mellon is a complicated company, put it that way.

BNY Mellon Investment Management equally so we own a bunch of of independent quite well-known investment houses.

So Insights, Investments, Newton, Walter Scott, Mellon in the US.

All of whom come at the question quite differently because Insights are fixed income house largely, Newton's thematic equities multi asset sort of place, Walter Scott - bottom up equities.

So what I tend to find is that by telling these stories you actually end up engaging with the fund managers much more effectively.

Because what you're not trying to say is, this is what's going to happen to the world.

And therefore you should position your portfolios like this.

-And lose.

-And lose all your credibility, exactly.

And me - my job or something like that.

What we say is, look, these are the plausible scenarios, the most plausible scenarios for the world economy.

We think you need to take account of all of them to some degree.

You will have your own view about which is more likely or not, and you will position your portfolios on that basis.

But we find that it's a very constructive discussion when you approach it that way as an economist.

So I think that's it for the panel discussion.

I'm going to now hand over to you guys to hold these Galacticos feet to the fire.

-Nicky, welcome back.

-Or Will.

Absolutely not.

I'm going to sling off quietly.

So just to remind people, you can post questions in Vivox and I'll pick those up.

But I can also invite, I have to admit I'm not going to do as good a job as on Question Time, because the lights, I can see.

But I'll try my best.

Yes.

Wave your hands if you've got a question in the room.

Thank you.

Behind him.

Yeah.

Hi.

I apologise if this is a bit of a naive question, but I think wisdom suggests that inflation should be 2%.

I don't know why it should be 2% rather than 1% or 3% as a sort of collective.

And the naive bit, I suppose, is if it were 3% to me, that might allow perhaps interest rates to come down sooner.

It might allow more growth in the economy, because.

you've got the ability then to grow more and actually it might reduce the burden of government debt because there's a higher inflation benchmark.

So do tell me if it's naive, but otherwise why shouldn't it be 3% or another figure?

-So, not naive at all.

-It's not.

-It's a very sophisticated.

-Very sophisticated, very good question.

I'm going to Hand Shamik this question because it's much more complicated than I'm capable of.

But I was amazed at how accidental the 2% inflation target was.

I think it was the New Zealand finance minister who just kind of off the cuff TV interview, and everyone was like, wow, 2%.

That's it is.

And then the whole developed world followed suit.

We copied them in sort of in '92, I think we were originally 4%, but we came down to two pretty quickly.

So yes.

So it's a great question.

It's a really, really important question.

And I'm.

so I'm going to answer it by saying there is a very legitimate debate to be had about what the appropriate inflation target is.

And some of the reasons you've raised are precisely the ones that economists want to talk about this, this question in particular for the past ten years or 10-15 years since since 2008, really, there's been a lot of debate about whether or not 2% is too low, precisely because you're more likely to hit that zero lower bound that I argued was quite a nasty place to be.

The only thing I'd say is, though, is that it's very, very unlikely that we can change that target now, while inflation in the UK is north of 6% or 4 or 5% in Europe.

Why?

Partly because bond markets.

If you decide, you know, -right, do you know what.

-I'm not.

I'm going to give up on the 2% target now, bond markets might think, Oh crumbs.

Does that mean they're giving up on inflation entirely?

Where do we put inflation in the longer run?

So I think what's going to have to happen is that we're going to have to hit that 2% target and hit it sustainably for a year or so.

But then I think you're absolutely right.

That debate will rear its head again.

And I think people will start to ask why, why, why 2%?

Why not three?

There's one small twist on that.

I don't want to take up too much time, but one small twist, which is that actually, even if inflation targets aren't raised de-jure because it's felt to be politically too contentious, or we're worried about the bond market reaction, what you might find over the next five, ten years, is that they're sort of de facto raised.

If central banks think it's actually the economic cost of hitting 2% is too high, then what you might find is that we take longer to get to that 2%.

So that ex post on average, it looks like we're hitting two and a half or something like that.

That's a very real possibility as well.

But what I would say is that for good financial reasons, but also for credibility reasons, we have to get back to 2% first before we have that debate.

Can I just.

Just very quickly to add to that, just the point about there's one question about what the policy is.

But also, as you mentioned, very important is the credibility of getting that message out there.

And one of the reasons why we see this volatility in the market at the moment is because particularly in the US, markets are hanging on every single comment that a Fed member makes or an MPC member in the UK, because they do have the credibility and they have the capacity to move markets because what they say is taken really, really seriously.

And we all know from our experience just over this time last year with the Truss era where you lose credibility, the markets will take over.

So I completely agree with you.

There's a very legitimate debate to be had, and that debate needs to be had and have a conclusion.

But then how to enact that, and the method by which that transition is made is also really, really important for stability of markets I think.

Great points.

Thank you.

Brilliant question.

We had a question from a gentleman in the second row in the middle and then to the front.

Thank you.

Thank you.

Thank you panel.

Shamik, if I get it right you anticipate an interest rate this year.

An interest rate hike this year.

How much interest increase do you anticipate this year and what do you think, what does the panel think the interest rate will be this time next year?

Quite forecast.

0.4.

No wriggling around with your probabilistic stuff here.

Good question sir.

If you say but, you'll get kicked.

So, I spent much of 2021-2022 arguing that the market has systematically got the peak in interest rates too low.

And I think the market, the bond markets generally have taken a long time to understand just how deep-seated this inflation problem is, that therefore, if central banks were serious, they'd have to raise rates quite a lot.

Now, I talked about a peak in rates in the UK of about 6%.

We may not get to that level, partly because the Bank of England looks pretty unwilling to take interest rates much higher from here.

But my concern is that at some point the inflation dynamic will force their hand.

Not straight away, not not immediately, but maybe early next year.

If there's one country that can get away with a lower peak, it's going to be the US.

The US looks like it's the most likely country to end up with what we call a soft landing, i.e. or what I call an immaculate disinflation, where inflation comes down magically and the economy carries on roaring on.

If there's one country most likely to get away with that, i.e. rates peaking where they are now and then starting to come down towards the end of next year, it's the US, but I'm afraid I'm a little bit more suspicious when it comes to the UK.

That's my question.

How much do you think they'll go up by?

I don't think they will go up this year.

-You thought they would go up this year?

-No I didn't.

No, no.

I think they will have to go up at some point.

But I think the possibly next year, I think it's most likely to happen next year because.

Not far off where they are now, where they are now, frankly.

I think the inflation problem is pretty deep seated.

And one of the reasons the bond market has sold off, frankly, is because it was expecting interest rates to come down from early next year.

You know, second quarter thereabouts.

And it's actually pushed that out towards the end of next year.

And I think that's a much more reasonable assumption because it's going to take time to get inflation back down.

We'll have Shamik back next year so that you can replay exactly those words.

No problem sir.

Very good.

We have a question from the gentleman in the front.

The rest of the panel as well.

Oh sorry.

Yes guys.

Any other.

Feet to the flames.

I don't know.

So what I would say is, you know, we might have seen the peak.

We might not have seen the peak.

We are close to the peak.

So I think it would be difficult to, I would argue it's difficult to see rates moving substantially higher from here.

And there's quite a lot of other forces at play.

And one of the things that our investment team talk about quite a lot is the extent to which the hikes we've already seen have been transmitted through the economy.

And we believe that there is still quite a bit of a lag in some parts of the world particularly where we've seen coming out of this period of very low interest rates for a protracted period of time.

Companies, if they've had the ability and had the sense, have termed out their debt to.

and have individuals extended mortgages or extended payments, loan payments for a longer period of time and locked in a lower rate.

So what we're not seeing is this kind of cliff of maturity, where they call it a maturity wall of suddenly debt rolling off and having to be refinanced.

Except in parts of the global economy or certain sectors, where it tends to be more of a sort of floating rate type structure that the debt is structured around.

So, for example, if you look at the banking sector, debt in Europe, that tends to be much more floating rate structured.

Whereas in the US it tends to be more of a fixed term and there's less sort of disintermediation going on.

So I think that the transmission mechanism is perhaps the lags are certainly there.

I think the transmission mechanism seems to be working, and then it's just an extent to which the lags have already been transmitted through.

I'm pretty sure I haven't answered the question, but the final point on this was just, financial conditions, interest rates are only one part of financial conditions, so there are other ways to transmit a bit of a break on the economy.

And one of those is credit spread.

So this risk premium I was talking about at the beginning, we haven't seen a substantial widening of that yet.

So if we see that then it may be that it takes the heat off the base rate move or an equity price move.

And there are other things that could happen.

So I would say probably an answer to your question, I probably wouldn't be very different from Shamik's view, which is I'm not so sure we're going to see another one.

We might see another raise, we might not.

But the way I think about it from an investment perspective is, from a bond market perspective, these are pretty attractive entry levels.

These are yields that you may not see hanging around for that long.

It may not be the best entry level, but if you're thinking about scaling into a long-term position this is very attractive from our perspective.

Can I just ask about the question of how you portray risk in your advice?

It's obviously tempting to feel one's got a balanced portfolio by having a little bit of bonds, a bit of equities and so on.

But actually, of course, that's not really a balancing.

It's kind of averaging in a way.

And I wondered whether you shouldn't be talking more about specific risks.

The balance between, for example, long-term and short-term gilts, the balance between not just US equities, just overseas equities and UK equities, but US equities and specific equities in the US.

And therefore in terms of helping people to know how they should balance their portfolios, that they actually need to know much more about the specifics of risk rather than just general asset classes.

-That's a great one.

-It's a great question.

I'm going to foolishly take it on rather than hand it to my colleagues.

So if you think about.

One of the problems with thinking too hard about specific risk, I sometimes think is when you look at the industry, it's sometimes quite telling, looking at the industry's outlook documents for the year ahead.

And all of us are asked to sort of say, oh, what are the big risks for 2020, 2122?

Dust off, if you can, all of the industry's Outlook documents for 2020 and see what you did in terms of the events that actually came along.

And we're usually sort of biased towards calendar events.

So people look next year at like US elections or UK elections or stuff.

The reality is in terms of investing risk is that it's not so much the stuff that people can see.

That risk is like an iceberg in a sense.

It's the stuff that's submerged underwater that you don't see or don't price, but comes out of the blue.

So in a way, the most dangerous risks are the ones that you can't see ahead and couldn't possibly plan for in some way.

And that is where in terms of how we design multi-asset class funds and portfolios here, we have lots of very clever people who I'm lucky enough to work with.

And there's one team specifically devoted to kind of mathematically imagining hundreds of thousands of different viable futures.

And the whole idea is you must force yourself to imagine a future that doesn't extend in a straight line from the recent past.

You have to imagine, just like the last few years and the danger, I think, for individuals in investing, one of the most dangerous things is momentum.

That idea, and this is where you see all sorts of people get caught out, which is the idea that as human beings, we naturally extrapolate, look at all of those films about the future.

They're almost all an exercise in straight line extrapolation.

Add in some angsty teens and you have a blockbuster.

The reality, as we know, is quite different.

And actually, if you tried to draw a straight line from that moment in 2019, you would have had no inflation, ever lower real interest rates, certain corners of the portfolio not continuing to do well.

Whereas the reality and the thing that I think the team here did very well was that we forced ourselves to imagine other futures.

And so at the beginning of 2021, the team added a lot of diversified commodities, inflation-linked bonds.

You've got to keep your foot in some of the dustier corners of the market as a result and accept that that at some point will drag on your returns when the popular stuff is kicking off.

But I think that rather than becoming too focussed on your ability to identify risks in the path ahead.

I think that would be the way that I would think about it, if that's okay.

And if I may segue from that great question and answer to one that we've got on Vivox, and I'll come back to a couple in the room.

So there's a question here saying, given the increased attractiveness of cash and bonds at the moment, does it mean that you need to take a higher-risk approach when you're investing in equities in order to make it worthwhile?

So I wonder if that's one maybe for our growth investor.

Higher-risk approach.

I mean, I think, when we think about risk it is in in two senses.

It's the permanent loss of capital.

And so doing absolutely fundamental due diligence of the companies we are investing in is so crucial.

But also I think when we think about risk in equities, it's the risk about not being imaginative enough.

I touched on Nvidia earlier and we invested in that in in 2016.

And we were just rereading the notes that we wrote at that time, and we were talking about the attractiveness of Nvidia for its chips being used in gaming and potentially autonomous driving.

And there was a very, very small footnote about AI.

And if that takes off, then Nvidia could have a really important role to play there.

And that was just a footnote.

So I think when we think about risk in equity, it is being, it is having that optimistic mindset and thinking about the future possibilities of what a company may become and the adjacent possible, which is what we've seen with Nvidia, some of the notes that we've written on the likes of Amazon that we've owned since 2007.

In the early days, we were talking about Harry Potter book sales and how that would affect Amazon, you know, cloud computing at that point, Amazon Web Services, we never thought possible.

So for us, risk in equities.

And I'm not saying take on more risk, but it's about being imaginative enough and thinking about the real outsized possibilities.

Because if you're able to identify the handful of companies that actually really matter, the risk of those companies that don't work out is completely diminished by the home runs.

-And just.

-Build on that a little bit.

And something Shamik said earlier as well is just thinking about equities at the moment, because a lot of people are saying, well, why do I need to take any equity risk if I can get whatever on account here and there?

Well, I might as well just do it risk-free.

And the answer that we would give in a sense, is that from an asset allocation perspective, you know, the exposure to fixed income will wax and wane according to its attractiveness relative to other assets.

But the attraction of owning companies' equities is that it's like a call option on future human productivity growth.

Now, if you're going through an industrial revolution, the Fourth industrial revolution, AI, all the rest of it, then you don't want to cap your exposure to the upside of productivity growth.

Now, you know, Rosie is right.

Fixed income is very attractive at the moment.

And there are certainly types of individuals with saving patterns who this will be very suitable for and helpful for.

But if you want to invest for a period of more than a few years, I also think that having equity exposure upside to human ingenuity at these moments, that's a really super attractive idea.

You don't want to just buy the ones that are already successful.

You know, these guys have done well picking out Nvidia.

But you know, the reality is, you know, we talked about this before, but if you're looking at industrial revolutions past, sometimes the gains can be miles away from the initial breakthrough.

You know, you buy the picks and shovels to start with sure, in a gold rush, but you know, you spread your net widely because there could be a broad beneficiary if timing is right.

Yeah, absolutely.

And I think there are for, you know, for all the reasons we've outlined, I think a higher hurdle rate, a higher interest rate, as I've said before, gives essentially investors the incentive to find the right companies.

And therefore, I completely agree that I think stock selection is, you know, this is a great environment.

It will be a great environment for good stock selection and that will essentially mitigate some of the risk that you're talking about, the risk of missing out essentially.

However, there are also strong arguments for sticking with indices as well, because at the end of the day, we don't know.

We literally don't know what the world will look like in 2040 or 2050.

The constituent members of any stock index changed dramatically in the course of 20 years.

And therefore, you know, this kind of barbell of exposing yourself to what is going to be dramatic, profound change through an index, but also relying on good stock pickers to pick the ones that are going to do very well.

It seems to me that kind of barbell strategy is quite a sensible one to have, but you definitely want exposure to equities.

-Get exposure to that world.

Absolutely.

-Very good.

We'll come back out to the audience.

Are there any.

Yes.

Sorry I've got the mic.

I guess it's a bit of a two-parter.

But given that rate hikes probably haven't impacted the economy, exactly how much and where we expected them to, is there any read across to how rate cuts might impact the economy?

If the answer is no, it'll be normalized, I suppose, would lend itself to, sort of the convexity in Baillie Gifford.

But if there is quite a lot of uncertainty ahead, perhaps how attractive is a sort of 2.

5% real yield on an index-linked treasury?

Yeah.

Thank you.

Very good.

-I can start.

-Yeah.

Go for it.

Yeah!

So, I will take the slightly more positive tilt.

I think sometimes.

we're in a way, I don't know if it's positive.

It's slagging off economists.

So I'm going to sort of lean away from Shamik.

But I think I'm a bit of an economist myself.

And I guess the interesting thing that you get in economics is that, you know, we're all desperate pattern-spotters.

You know, you want the sort of of splattered chaos of incoming data.

We try and force it into the model of the moment and try and make the world make a bit of a sense.

And the problem is with economics and investing in general, is that there's just so much grey area because the data we have, you know, there's only really plausible economic data for the post-Second World War period.

Was that 12 economic cycles in the US?

So in terms of what we talk about, statistical significance, being able to infer stuff from the data, you've still got quite a lot to make up.

So what the industry does, what the profession does is we, you know, come up with something that makes sense intuitively and see if that can support the argument with the data.

And so what you're left with, I think a little bit with the theory of interest rates, is that if you raise it, supposedly that makes saving more attractive, makes sense, and therefore your spending suffers as a result and therefore your economy slows, inflation declines, and so on.

But my personal feeling and Shamik may disagree here is that it's not just different this time.

It's different every single time.

And this time it is different quite profoundly.

And the problems we're having in the US and the UK to a degree are how do we account for and how do we incorporate this huge excess savings arsenal that's been sort of, you know, dampening or to a certain extent, dampening the blows from interest rates.

And if you're thinking forward and just to sort of to your point, you know, the whole industry, because we're tutored on this idea that raising interest rates causes a recession.

And it may still, maybe I'm just being too optimistic too soon, but we're all rather than treating the economy as innocent until proven guilty, we're treating it as guilty until proven innocent and looking for evidence of delinquencies in certain households and so on.

I think that could be leading us astray, potentially.

And my personal feeling is that the economy always needs to be treated as innocent until proven guilty, because growth is the norm, not the exception.

Because most of the time humankind is inventing new stuff and getting better at using it.

And that creates forward momentum in most places.

That's been it's been a little bit dry patch recently, but I think that changes things.

And right now, you know, real inflation-adjusted wages year-on-year are turning positive in the UK, the US, Europe.

So there are still reasons to be constructive.

And the other point I'd say is that there are reasons why this economy, the massless service sector economy might be a little bit less interest-rate sensitive.

And we all know the story about the US.

You know, in certain companies you're still getting ever lower interest rates.

And the consumer is kind of locked in.

And that's why you're still seeing things power on.

So it's a good question.

And I think I've answered with a kind of wishy washy on the one hand and on the other kind of answer.

But yeah, I would probably be a bit more optimistic on the economy and its chances of avoiding recession.

But I will look forward to in three weeks' time when we're in the deepest recession in living memory for all of you to come and get in my face.

Yeah.

Disagreements, agreements.

Long and variable lags.

Right?

That's our escape clause.

We've always known that, you know, the impact of interest rates on the economy varies over the cycle.

And, you know, we've not been able to pin down precisely what that relationship is.

Having said that, we do know broadly what it is.

You put them up, they.

that tends to bring growth and inflation down.

What I would say is that I think something that.

some people have got wrong is that I use the analogy of, you know, if you've got a clapped out old banger and you're going up a steep hill and you know, and it starts to slow down and stall, what do you do?

You put your foot on the gas, don't you?

Right.

So if the economy is less sensitive, if it's a steeper hill that you're going up, actually you probably have to do more, not less to get to your end point successfully.

So I don't think there's a huge amount of discrepancy about the way the US economy, for instance, has reacted to the rise in interest rates, and I suspect any subsequent cut won't be very different from history.

But it's certainly been a bit different, partly because of the excess savings, as you say.

So, I'm super conscious of time because I think we are reaching time.

But I'm pretty sure maybe we can take some more questions over drinks with the panel if people aren't rushing off.

So feel free to collar any one of them.

Notice I said them, not me.

But we have got some more questions on Vivox, but I am conscious of people's time, so I think what we'll try to do is make sure that we cover some of maybe on our podcasts and make sure that you're not left dissatisfied.

But with that, I really want to thank all of you panellists.

I've got sort of corporate Botox ringing in my ears.

I've got creative destruction and that kind of thinking and loving the idea of a bit of sort of rational disruption and the future hopefully looks pretty good.

So thank you all for coming.

Thank you to the audience.

And thank you for people on the webcast.

Just to mention that we always love to get feedback because these are all about us trying to provide you with what you'd enjoy and find useful.

So we will send out some survey links after the event.

And also just the last reminder, boring as it is, but this hasn't been personal advice, so please don't take it as such.

If you are a client of Wealth management, your wealth manager will be in touch with you in coming days to see if you want to find out a bit more about any of the things that we've talked about.

So with that, thank you very much.

Thank you to the panel and have a good rest of your evening.