Ben Wattam

Thanks, Tim. Now, I think we’re having a few technical issues. I don’t know whether you can actually see me or not. If you can, great. If you can’t, it’s probably for the best, you can’t see me anyway. I’m just going to talk a bit about what’s going on with markets for the next 10 minutes or so. Now we’re in summer in August, so markets are actually a little bit dull. I’m going to concentrate more on the macro side and what we see and whether it’s a good time to start investing. Now the first chart on the left is from the Bank of England that shows average earnings in the UK and you can see that average earnings have actually picked up quite strongly following the height of the pandemic last spring. So in the UK, average earnings are higher, the consumer is actually in a decent space from a from an income perspective and on the right, you can see that the consumer has actually started saving quite a lot as well. Excess savings is on the vertical axis, and the amount of fiscal support is on the horizontal axis. You can see it’s not just the UK, around the world, there’s been a big boost in consumer savings, which should mean that consumers are in a good place the next couple of years, more support, if we have some choppier economic times the next few years. It’s not just the income perspective either from the consumer, the left hand chart is from Halifax house price index over the last 12 months and you can see on the right hand side of the annual change, house prices in the UK have gone up quite sharply as probably most of you will be aware of and that provides a nice wealth boost, because the majority of wealth for a lot of people in the UK is actually their house and when house prices increase, it gives them a wealth effect that gives them a positive feeling, and gives them more confidence to go out and spend. It’s not just a rise in income, but we’ve also had a wealth effect. Now the right hand side shows the mortgage rate, average mortgage rate in the US, which can see have come down quite sharply. So not only we’ve had a positive income effect and wealth effect, actual cost of debt has dropped. It’s not quite as large in the UK as the US but it’s still rates at very, very low levels. So the consumer is in actually a really good place at the minute. Now, if you’ve heard me speak in the last six months, you’ve probably seen me talk about this chart before this is called the Purchasing Managers Index and it asks purchasing managers around the world whether effectively they’re going to be buying more stuff for their business or not. Now this is for manufacturing companies and a score above 50 suggests they’re going to be buying more stuff that month, the score below 50 suggests they are going to be buying less stuff. Pretty simple and JP Morgan have done a nice colour coordinated chart so you can quickly eyeball to see the strength of manufacturing companies around the world. You can see at the minute the May and June figures on the right are near all time highs, not just in Europe or in some developed markets but pretty much around the world. Now, I don’t need to tell you, if you go and try and buy a big ticket item at the minute in the manufacturing space, whether it’s a car or something for your house, there’s big supply problems. There’s excess demand at the minute so in a manufacturing space, it’s actually a really positive story at the minute and the important thing for companies as well as is cost of finance. So how cheap is it for companies to borrow at the minute? Now, the blue line is the cost of borrowing for high quality businesses in the US and this is the cost above government bonds about government debt. But as government debt is very, very cheap at the minutes near zero, then this is almost an all in cost. So you can see the blue line. It’s costing high quality companies in the US about one and a half percent or so a year on top of the government rate to borrow at the minute, which is really cheap and it’s pretty much the cheapest we have had post financial crisis in 2008. There’s not just high quality companies either, more cyclical businesses or less quality is the orange line and you can see that it’s near all time lows as well. So companies can find it very, very cheap at the minute to borrow credit, which is a positive space for companies to be in. You can tell the strength of companies from earnings from profits. And this, this chart is from the S&P 500. So the biggest 500 companies listed in the US and the chart goes from 2012 on the left and we’ve got a bit of forecasting in here on the right hand side, the forecasting is from S&P who run the index. You can see the big drop in earnings and profits we had in the pandemic last year but look at the bounce back. We’re now in the US we’ve got profits higher than they were pre pandemic and there’s still expectations that they can grow those profits further. So overall, companies are in really good shape. Now, you’ll have heard me recently talk about tech and growth and we’ve been saying that it’s not about Apple and Amazon and Google and Facebook of the world anymore in tech, it’s trying to find smaller businesses and medium sized tech businesses around the world. We buy two assets for portfolios, one called Draper Esprit and one called Chrysalis. You can see there, the total return performance on the left hand chart over the last 12 months, they’ve both done very, very well, both at nearly 100%. Draper Esprit is up another 8% since I pulled this chart. You can see the holdings, some of the largest holdings that these two companies own on the right. Most of them are private named still. But they’re all tech enabled businesses. They’re not necessarily technology, but tech enabled and whilst growth has had a bit of a difficult spell earlier this year, we think if you’re in the right sorts of growth businesses, we still think it’s the right place to be. Now, it’s not all pretty. The first part that you have to be a little bit cautious of is the level of government support. Now, we’ve seen huge levels of fiscal and monetary support, not just in the UK, but around the world. We’ve got the furlough scheme ending next month in the UK but the overall mentality of government support is changing. So you can see this from these charts from the Federal Reserve. The left hand side is what the Federal Reserve Board of Governors think interest rates are going to be going forward. Now, this was taken at December last year. So eight months ago. The chart on the right shows the Board of Governors, the Federal Reserve in the US what they think interest rates are going to be as of June, and that each blue dot is what each governor thinks interest rates are going to be going forward. You can see in December, pretty much the whole board of governors thought that interest rates weren’t going to move in 2021, one person thought they might move in 2022. If you look at what happens in the latest one in June, there’s a lot more governor’s now thinking that the rates are going to rise in 2022 and definitely in 2023. So whilst rates aren’t going to go much higher, anytime soon, the change of mentality is important. We’ve seen other governments as well trying to crack down on different areas. Now this is an asset we actually own usually I’ll just show you charts of prices going up and values going up because it’s easier. But this is one asset we own in portfolios, which is managed by Morgan Stanley in Hong Kong. It’s an Asian equity fund and you can see in the last six months it has been pretty painful. So it’s down nearly a third this asset is and it’s all to do with regulation in China. Now, if you’ve seen in the news, China’s been trying to tighten technology regulation, but it’s not really technology, it’s all about data. The EU had GDPR a couple of years ago, this is what China is going through, understanding how data is being used in China and where data is going and they’re really concerned about data leaving China. So they’re trying to crack down on data management in China, which is spooking investors. We still think it’s a great place to be investing in the long term but short term sentiment is really negative on regulation in China. This is something that could come in the US as well, from a regulatory point of view. Markets have done really well in the last year and this is a chart showing the S&P 500, the main market in the US, on the bottom horizontal axis, we’ve got a ratio showing valuation and on the left hand side on the vertical axis, what the annualized total return is, for the next 10 years based on the starting valuation on the horizontal axis. You can see where we are at the green bar at the minute, which suggests that the next 10 year annualized returns, they should be positive, but they’re not going to be standout for the S&P. Whilst we’re still positive, you’ve got to probably be a bit more active in your management. We’ve had such strong growth in passive indices that you’ve got to be wary of where you’re investing and have a bit more active stance.

There’s loads of investment managers and banks that will give you predictions for next 10 years, I’ve taken to here as to what predictions are going to be for next 10 or 15 years. JP Morgan’s is on the left, Schroeder’s is on the right, and look, they’re going to be wrong but it’s interesting to see what they think is going to happen. So JP Morgan’s on the left, the bars are what they think returns are going to be for the next 10 to 15 years. The purple dots are what they have been since 2009 and you can see pretty much across the board, returns going forward are going to be lower than they were historically according to JP Morgan. You can see at the bottom part of that, investment grade corporate bonds, cash gilts, inflation linked gilts, safer areas of investing are going to really struggle. You can see in Schroeder’s table on the right as well, the top part of that table is lower risk assets and forecast returns are really, really low. So it’s not a cheap time to be investing, you’ve got to be active in your stance. Now our outlook, we do this every month, and we try and let the data do the talking for us. So we look at data and see what data is telling us whether we should be positive or not. And pretty much across the board data saying be positive, have a positive outlook & take risk. Now on the next slide, this is growth estimates. This is from Goldman Sachs. Again, they’re going to be wrong, but it’s a positive outlook and it’s not just certain countries, it’s across the board having a positive outlook. The US economy actually last week said that the nominal size of the US economy is now bigger than it was pre pandemic. We think it’s a positive time to start investing and the estimates of growth are positive. When you have positive estimates of growth, from an economic point of view and an earnings point of view, it can be dangerous to go against that. Which is what this this last slide shows, so on the left hand side, you can see the probability of the US market having a negative total return during a time of economic expansion is relatively low. The probability is that you’ll get positive total returns from investing in equities when we have an economic expansion, which is where we think we are, we might not be as early stage as we were earlier this year or late last year but we’re still in an expansion mode. So the probability is that you’re going to going to be rewarded for taking equity risk. The right hand side shows where we are from the bottom of the market last spring. We’ve made a decent gain in the US market but comparing it against previous expansions, we’re still in the really early stages of this recovery. Most of the data is telling us to take risk, be positive. So most of our portfolios are still taking on risk but you’ve got to be aware of where you’re taking that risk. It’s not a blanket approach where you invest anywhere anymore, you’ve got to be really specific on where you want to take that risk. So with that, I’ll hand back to Loz for the Q&A.