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00:00Right. Well, I don't need it. Introducing it, but I do want to say that if you fall asleep during this, you don't have to worry because we are live recording the Marriage Tax Money podcast. So be able to listen to it over and over and over again at your leisure later. Right. We're going to stop. We've only got 25 minutes, so we're going to dive right in. Sebastian, thank you for being on my live recording of my podcast. Pleasure, Marin. We're going to start with something that I read in in one of your newsletters. OK. Markets are never constant. They change and evolve like the weather trends this can sustain for months and years, perhaps even a decade, but not forever. Now we're in the middle. I think you would agree of a massive raging regime change for markets and from the world of low interest rates, low inflation, globalization, peace, low labor costs, cheap energy, all these wonderful things to a period when all that has changed. Is that fair? That how you're looking at it? It's very far and it means that it's going to make investing a lot tougher over the next three or four years, maybe the next decade than it has been for the last decade. The last decade, you will most needed to just actually just do very little buy and hold, buy and hold great stocks. They were rerated over a period of a long, long period of time. They're very good companies in the UK and the US where you've seen steady growth, not spectacular growth, not like the tech companies that we were hearing about earlier, but just good solid engineers, businesses that are growing 5, 10, 15 percent per annum. And they've been rerated they're rerated hugely over the last decade. They went from 15 times earnings to 30 times earnings before Covid, even for Covid. We had the Covid blow out. They went to 50 times earnings. Back now at about 30 times earnings. You know, we were on a long journey back to that 15 times earnings where we were when interest rates were still zero. Back in 2012. Interest rates are now between 4 and 5 percent. If you look back at valuations when interest rates were 4 or 5 percent prior to the prior to the financial crisis, valuations were on the mid teens multiples for good, good quality stocks. So I just think we have a long journey ahead. That's going to be more volatility and. And that's what you need to be patient about in terms of from perspective investing for. For private wealth, which if that's what I'm doing. Yeah. All you're doing is attempting to preserve capital. Yes. But you've been positioned for inflation for quite a long time. Yes. Possibly too long. Yeah. Leave me alone. Thank you. Thank you for that. So you came into this latest battle, inflation. Ready for it? Yes, pretty ready. I mean, I think that we were aware that there were there was huge concerns that interest rates were worth far too low and that inflation was unlikely to remain stable. And the remarkable thing is that come two years ago, two and a half years ago, 10 year yields got as low as nought point five percent. That sort of started a journey whereby the dominoes sort of effectively fell. And then we saw inflation remain sticky due to that, those post covered issues. And that sort of continued. And then obviously a year ago we had the war with Ukraine, which I think was a massive wake up. Anybody who thought that inflation was going to be transferring any thought that he thought that inflation is going to return to 2 percent. Which markets were forecasting at that particular point in time? Well, I think that that was when everyone realized that interest rates needed to go up new scale quickly and inflation is likely to be around. And here we are a year later, UK inflation at ten point four percent. It's just it's not it's not that there are still people who think it is going away. There are still two people who believe that once the impulse of higher energy prices and the supply problems of Covid disappear, we will go back to 2 3 percent inflation. Interest rates will fall and the old normal of what we perceive as the old normal will return. And then the panel before us will be happy because technology stocks will soar again. The everything bubble will return. I don't sense Panglossian, but that's very optimistic. Of course it's possible. But I think it's I think it's unlikely for all of the reasons that you gave in the original question. You got you've got globalization happening. You've got the power of labor, which is higher than it's been for for many years, if not decades. And I think one of things I've always said about the expectation for higher inflation is wages and wages that you've got to look at. Ultimately, there's noise of of commodity prices as the noise that the oil price, that's noise of food prices. But ultimately, the thing that sustains inflation over longer periods of time is, is wages. And we have actually been seeing wages rising materially. We've seen strikes in the UK. But generally, wage price pressures are services have come back. Post the pandemic particular. Last year, we've seen a material amount of wage pressure. Now maybe that won't be sustained. We can track it company by watching Indian membership. I'm one of the most interesting dynamics of the whole thing. I remember being told a couple of years ago that wage inflation could not be sustained because the unions weren't powerful enough and thinking you've got that the wrong way around. Union power flows, inflation. Inflation doesn't follow a union. And we can see union membership rising and rising and rising, which may not be a bad thing. I don't know. Let's talk. But I think wages are key capitals. Had it, you know, had a fantastic time for the last two decades, three decades. You could say, you know, it's Labor's time and Labor is having its turn certainly at the moment. We'll have to see how that lasts. But if that continues, then I would be more cautious about video gave earlier about, you know, rates going back down, inflation. How about don't know what I think. I think we're just in a world where things will be more volatile and inflation will be more volatile. Fission will come down. There's something called the base effect where she soon knows about the base effect. It's not stupid. So that's what he's forecast. Inflation is like to half this year. Maybe it will maybe it won't have the base forecasting. He was saying he was going to bring it down. Yes. Yes. So single handedly so. So but there is a base of. And so unless something dramatic happens from a geopolitical perspective, the oil price has got two hundred fifty dollars or something, then inflation is likely to be falling this year. The question isn't whether it falls. The question is whether where it stops and ultimately whether there's a sort of second wave out next year and the year. Yet beyond that will be the surprise to the to the investors who who are saying things are going to come back to where they were pretty Covid. So it feels like an environment where you would expect volatility at best. Yeah. Yeah. Okay. So rates rising rates are not going to come back down to zero. This isn't going to happen. And in an environment where rates have basically been falling for a couple of decades plus and they all day for decades and they start to rise, things start to break. And we're beginning to see things break in at the rate of investment trust. We're beginning to see some some problems related to to rising interest rates. We're seeing very bank problems, etc.. What's going to break next? Where do you see the brakes coming? I asked about this earlier. The usual suspects are European banks. They're usually one of two. We've had a we've had Credit Suisse. But I suspect it will continue to be within the banking sector or within sort of shadow banking type companies perhaps that we've never heard of, like green. Yeah. But those sorts of issues will well, I suspect these dominoes will continue to fall. One of the things that I think there are there are parallels with what we're seeing at the moment from a stock market point of view with 2000 to 2003 and 2007, 2009. So the financial crisis and the dotcom bubble busting both that both of those times the S & P fell about 50 percent and that people say, well, is this great financial crisis? No, it's not. The banking system is is a lot better capitalised, particularly the large banks are much better couples than they were when Lehman went bust. So there are differences, but there are similarities. And we've seen, you know, attack fast, effectively, and we've seen issues in the banking sector. And this time they're related. Whereas in 2000, the banking sector was fine and in 2000 and 2009, the tech sector was actually not too bad. Now we've actually effectively got them got them converging. So I think we need to think about the the merging of those two bear markets and think that's probably what we're facing this time around, something significantly worse than we've well, not necessarily worse, but probably, you know, I think you've need to be open minded about how it's going to play out. But I think it's going to be open minded. But we don't know. That's complete. Yes. No, we don't know it now. But. But, but. But I suspect that there will be more accidents ahead because interest rates are still we're talking to the ECB raise rates by 50 basis points last week in the face of SBP. So clearly the focus of central bankers is still on inflation as it should be looking at the UK today. Have one of things that might break, of course, would the UK housing market. Your favorite topic, a favorite. We've been on the air for a long time, about one day and one day when rates rise enough. Yeah, that will break. Yeah, well, that is I mean, to the domino effect. That is the effect which I need speaking about on your podcast last week about fixed rate mortgages and the fact these fixed rate mortgages are coming off gradually would not have any immediate impact of the 1990s down somewhere. Interest rates went up from seven and a half to 15 percent within the space of a couple of years, and it was immediately very painful for people with mortgages. This time around, there's a slower effect of those interest rates. The Fed's coming off, the two year rates falling off and people obviously stepping up and having to take a 4 percent rate, for example, rather than 2 percent rates. So I think your your UK property bear market, long loved May may take a little bit longer to come through. It'll be slow, but I certainly think that. I mean, look at looking at the house builders. The share prices of house builders which halved last year. That's telling you that you're looking at a pretty, pretty hard line as one of the reasons why we don't invest in house builders. That sort of thing can happen and it can happen very quickly. And that's when you least expect it. So we will see on the UK house building fronts after my prognostications in the past. In Australia, there is a stage to get on and we don't invest. We don't invest there. So we do invest in banks with investment house. But this is not actually something which will affect our portfolio particularly. Okay, well, let's talk about then where we can hide, because in almost every other crisis and my career anyway, there has been somewhere obvious, not necessarily immediately obvious, but somebody you can hide some area that's cheap, something that hasn't been caught up in the previous mania and this time round. I want to see that thing. It is incredibly hard to see that. And this is we have been talking about this in our investment force for for a number of years in that we realised that when the debt bubble, when when the bond bubble burst, the equity bubble burst at the same time. And so whereas in 2008, you could hide in fixed income, get out of the actually market, move in fixed income, move into dollars, you were fine. You were fine. In fact, you could actually make money in 2008. Within that environment in 2010, 1, 2002, 2003, which when I started the trend from when I started Troy, then you could there was some UK value stocks which were well capitalised, things like pub companies, well capitalized, good general generally good cash flows, good dividends. They've either been taken private or they've geared up a lot in the falling interest rate environment. So there aren't suddenly the obvious places to hide within NIKKEI market clearly with bonds. It's tricky. I think short dated bonds are a fine sort of one two years with a lot of money. During the now infamous mini budget in September and October when rates spiked to over four four and a half percent in the UK. That was a wonderful opportunity to sort of just lock in to your money. But you're right, there aren't very obvious place to hide. The dollar was good last year. That really helped us last year. This year, I think the dollar's a harder one to call. Generally speaking, when there is risk off markets and if he writes about other accidents happening, then the dollar should do well within that. But I I suppose I'd be surprised if we saw quite the sort of melt up in the dollar meltdown and sort of sterling that we saw back in September of last year. So so that there aren't very obvious place. I suppose the one that you'll probably want me to mention is gold. I do want to mention that until the end, but which has not been it has not been in a bubble. It did its job in 2020 during the pandemic for us when everything was was melting down. Did its job for us last February during the invasion of Ukraine. And it was flat last year. And everybody everybody looks at the dollar price. Marin. Don't look at prices in other currencies. We don't hedge are gold. So sterling gold and sterling gold was up 10 percent last year. It did it did its job for us within the portfolio. You know, it's made a new high in Sterling. Last week was early this week, definitely last week during the Credit Suisse debacle. So I think that that still may yet do its job. It's certainly feeling certainly feeling that way. It's feeling as if it's not a bad place to be in an environment where inflation is high, when negative real rates are likely to stay in place, you're not going to see a situation where central banks are going to be able to put interest rates up well above the rate of inflation, which is what positive real Brad Stone because more things will break because a lot more things will break. I mean, I think that was the real wake up call of the LG ISE situation. That was the moment where people realized policymakers realize we cannot put rates up to 5 percent. 6 percent in the UK. Too many things will break and so rates are probably gonna start to stay higher for longer. As a result and there'll be there'll be some drift in terms of policy on on inflation targeting. We've seen that with Howard Dean's article in the FTSE. We've seen it with Howard Davis at NatWest talking about he thinks we should allow the inflation target target from the Bank of England just to drift out maybe maybe three years or four years, allow them to have a bit more time. That's slippage. Effects of label inflation targeting 3 percent. Exactly. Amanda Lang Amanda Lang. We'll move it all. Move to a range from 2 to 4. Yeah, whatever. And that is effectively debasement. And that is that's a good environment for gold. So. So I think gold will have a role to play in terms of personal assets. For example, hold it in gold. Let me do Amanda Lang and tell them since. Okay, I'll on it presents a full year portfolio and gold has actually gone up. It hasn't gone up momentarily. No, it's it's been about central and central for a while. We wouldn't have it go up to about 15 or 20 percent. I think what's really important with holding gold and having a role within the portfolio is he wants to have you want to have enough to make a difference. There's no point having one or two percent. It just doesn't move the needle. But you also don't want to have too much where the tail works, the dog fights for you. It's affecting it's affecting the knife. The knife too much. You want to place your foot full, full back to that. But I think it has a role to play in terms of its defence ability. And you've seen it time and time again. Well, now, three, three episodes in the last three years where it's kicked in and it's actually kicked in very nicely at a time when things have been pretty febrile and there were a lot of losses out there for elsewhere. Within within portfolio, in other portfolios. And how do you hold the gold great in person and past personal assets? We hold it through, through and through. Sorry. A an allocated account. JP Morgan, just like a bank account. And that's about 10 percent. Then we have one half, two per cent in a company called Franking Nevada, which is a gold streaming and royalty business. We haven't got any direct mining exposure. I'm I'm I'm scarred from my previous gold mining investment experiences, the scars on my back. So I like the idea of streaming because effectively the far in control of their own destiny in terms of the fact they've got one hundreds of investments around the world that are continuing to rob like an investment trust, really a diversified portfolio of royalties coming in. We can we count. And if one mine doesn't work, it doesn't really matter. Whereas if you're a miner, you'll tend to have only four or five mines. If one goes wrong, then production issues are it can be a real, real problem. So so no. So, Frank, Nevada has been a core holding for about five or six years and it's done very well for us. I'd quite like to ask you about Bitcoin. You've not me, Bob NIKKEI. I'm gonna go put out another ISE against inflation. Hang Seng. I mean, I think we know what I think. I know. I think crypto, just as for me, goes into the too hard basket. I think it's been found out a little bit. I was very honest to Niall Ferguson his comments about about about his view on on crypto and the fact that crypto had been sort of effectively corrupted. We've never held it. I've never held it. I think gold has actually proven itself over the last year or two or three during a period where bitcoins been very highly volatile. And I think that volatility is the definition of, you know, people don't know how to value something. And it's about the most volatile thing that you can own. So clearly, people don't really know how to find events ISE causation. By the way, everybody was in my that my last podcast with Neil. Thanks. And we discussed this. Okay. Let's move on from that. I'm interested in you saying that when I was talking about there being somebody to hide, some of that wasn't caught up in the everything bubble. And you said no. Previous times have been good value stocks in the UK. A lot of my podcast guests say exactly that. Now there is a place to hide and it is the UK which is cheap on any measure you could look at it. And the value ratio between the UK and the US for example, is it is one of the widest it's ever been. And not only that, but these are good high quality companies operating internationally with good high dividend yields. And I think, you know, you and I both agree that a good dividend yield is one of the greatest hedges you can get against inflation. So why on earth would would an investor like you not be pouring into the UK market? We're definitely looking for you. I went to visit the headquarters of a UK company in Slough this morning, so we're definitely looking at UK companies. I would say Marianne, I'd say a half right in that I'm not quite you. I think you're comparing chalk and cheese a little bit in terms of comparing the US with the UK. The if you scrape scrape below. Surface a little bit the businesses within the UK. If you look at the footsie, there are a large number of very large cap companies that are highly cynical. We've got a very large percentage in oils, we've got mining, we've got utilities with large telcos exposure and Vodafone Beatty. You've got a very large exposure to banks. You've got house builders. It is not like the US. And yes, there is a valuation differential. And I think there are some things to blame for that in terms of Brexit and other issues that you've discussed in the past. And definitely investors, particularly in the UK, have been selling down in the UK. We can see that with the flows in unit trusts over the last five or six years. Wealth managers have been reducing their exposure to the UK stock market. One I happen to know is reduced from 30 percent of their portfolio down to about 3 percent of their portfolio. Specifically in UK stocks. So you might say, well, there's nobody left to sell. That is exactly what I was going to say. All the big domestic pension funds and all the big dollar funds are shifted, which they have now shifted their holdings. UK equity is down 30 40, in some cases 50 percent to a maximum. In most cases, 3 or 4 percent. They're done with the selling. It's over. So that may mark a boss. I make my one reservation. Is all of those sectors that I mentioned probably the exception of some pharmaceuticals. A lot of their sites are very cynical. They did really well last year because we were in a set up time. If I'm right and I suspect we're going into a hard landing, a more traditional hard landing than the ones we've had in the past as well. So by that I mean more traditional than the Covid recession, more traditional and perhaps the financial crisis, recession, more likely recessions we used to have in the sort of early nineties that have sort of slightly more prolonged central banks fund titan to get inflation down, slipped slightly old school, then those typical companies like the miners, slightly oils like the banks, probably going to struggle. So they're going to really struggle with with with with earnings, I suspect. So you may be right, but not yet. The other thing is looking at the kinds of companies. Right. But not yet. But I think that in terms of some companies that we look I mean, my largest holdings, Unilever, Unilever is definitely on a discount to the likes of Procter and Gamble, Nestlé, its peers, which we also hold, but not to the same extent. I think there is a little bit of a gap. It's not massive. But I think there is a little bit of a gap between those better quality blue chips within the UK and their international peers. I think that is a government has to narrow. And where we have been adding, we have been adding that. So I think, you know, that's my life. Right. But there is a reason why lots of companies are thinking about moving their headquarters to America. We know exactly what it is. So they can get a high share price, right? Yeah, absolutely. And traffic. No, no, no. I mean, I think that I do think that the UK market has got a problem and they couldn't get on on back. They've lost some great companies over the years, like cap rates, which we were a holder of. You know, there was no replacement for coverage. It's now gone to Mondelez in the US. So I think that's the sad thing is we have lost some some great companies in the UK and they haven't been replaced. And that is something which has been discussed ad nauseum for the last five or six years. And I'm sure you've written about it in your in your articles, but there doesn't seem to be a resolution to that. And the concern is that where we've got things like companies look good, companies like Ferguson speak all Wolseley in the UK, a large but 100 company, move into the US. So I think that there is. I mean, it's not an easy decision. I saw that BHP suggested by one of the shareholders that to be a teacher, to some it's got a very big U.S. business that hasn't got a UK business. So there is some logic to BHP moving to the US and tobacco companies have slightly higher ratings in the US than they do in the UK. So we'll see whether they do it. It's not an easy thing to do. It's not actually an easy thing just to get it. I work at a company where they were getting a NASDAQ listing. They had a UK listing, but they wanted the NASDAQ listing for exactly the reason that you said and I remember it was it was bureaucratically really tough. So you couldn't be absolutely sure your share price is going to double. Yeah. Yeah. And let's talk briefly. We got much time left. Sorry about the rest of the book. Fairly how much better it is in equities at the moment to it, low 20s percent. So it's basically the lowest it's been for 15 years and even lower than it was in the financial crisis. Partly coming back to the point, you said that there aren't places, there aren't obvious places to hide within this equity market. If there were, then we'd have a higher proportion equities. But for exactly that reason, we're worried about that continued not only multiple contraction this year, but also the fact that there's more earnings risk and interest rate costs keep going up for companies. Companies have taken on frankly, they've taken a public come into town too much debt. Debt levels have pretty much doubled over the last year. And a lot of companies. We've seen it companies that were comfortable with one times net debt to have it to. Comfortable the two companies that were comfortable with to a comfortable with full and increased tax and increased increased interest costs mean that the earnings the top line might be fine. But actually the bottom line, the earnings are not going to be as good. So so that's why because of those lack of places to hide. That's why we're we're very conservative position at the moment with the idea that probably within a year's time we'll be much more hopefully positively positioned. We're right because we have only got a few seconds left. So let me challenge you before we end. Give me one piece of good news. I think I think that sometime in the next 18 months, it's going to have very good time to buy the equity market. Just got to be patient. How will we know how we know? I think just keep an eye on valuations. I think valuations are going to that. That's what I look at. I look at things like the cape. I look things up since like the Q ratio. I look at the bottom up stock picking our bottom up stock, picking our stocks and look at the valuations on day by day basis. And that's what informs me as to whether I'm going to make these longer term returns. So it'll be valuations, which are the key. All right. I want to call you every week for the next 18 months until you tell me it's time. Okay. All right. Thank you. Thank you very much. I look forward to it.

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Strategies For Wealth Creation: Troy Asset Management’s Lyon

Sebastian Lyon, Founder & Chief Investment Officer, Troy Asset Management speaks with Bloomberg’s Merryn Somerset Webb in a live podcast recording of Merryn Talks Money at the Bloomberg Invest Summit in London. (Source: Bloomberg)

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