Ben Toms

Hello, everyone. Welcome to the eighth wonder of the world webinar. Hope you’re all doing well and looking forward to our second webinar of the year, we’ll be covering a few topics such as compound interest rates, and an overview on inflation. All these slides will be sent to you after anyway. So you can look back at this in your own time, if you wish, they’ll be sent via email.

So a little bit about the structure of the webinar. First of all, I’ll run through a little bit about us, about the business and the people involved. And then I’ll pass it on to Ben, our investment manager who is going to be talking a little bit about inflation, and the current situation regarding inflation. And then after that, we’ll move on to Tim who’s going to go through a planning session, he’s going be talking about compound interest rates. And he’s got a case study he’s going to run through as well to bring the section to life a little bit more. And then after that, we’ve got a little designated area for a Q&A. So please do feel free to put your questions in the chat box and we’ll have a little bit of time where the directors will be answering your questions. And then the last bit will be next steps, so a little bit of point of contact for you to ask any questions or give any feedback on the webinar.

So about us, the company was founded in April 2020. This is a little bit of an outdated photo. So on the left-hand side, we’ve got one of our financial planners, Neil Wattam. on the inside of that we’ve got Tim Kirby, who’s joining us today. He’s a financial planner. In the middle in the bright pink coat, we’ve got Loz Gee, our operations manager, she’s currently away in Santorini so lucky for some. On the right-hand side of her we have Adrian Mee who is another financial planner. And then on the far right, we’ve got Ben Wattam, who’s joining us today, our investment manager. The company is Financial Planning and Investment Management Company, together the guys have around 60 years of experience in the financial services industry. So plenty of knowledge when it comes to planning and investments. And I suppose the main point here is that we will love what we do on a day-to-day basis, being able to be on the journey for our clients reaching their financial goals, whether that be something big like planning for retirement, or little things like saving for a new car or holiday home. I’m going to pass it on to Ben now who is going to go through a little bit about inflation.

Ben Wattam

So I’m going to just run through, as Ben was saying, just a bit about inflation from a market’s perspective and economic perspective, because people talk a lot about inflation, especially at the minute but I don’t know whether people understand inflation from an economic perspective. So inflation is just a measure of changing prices each year. And if you look at the Bank of England or the government ONS, Office of National Statistics, they’re talking about different inflation measures. There are loads of different measures of inflation we use for different things. So we might use RPI, for various things like train fares or pension increases, or the Bank of England use CPI consumer prices index, the ONS use CPIH as the official measure for UK inflation, which includes housing. But the Bank of England’s use core CPI, strips out energy and food and things like that. So there’s lots of different ways you can measure price increases. And inflation, I think you want it to be like your porridge in the morning, you don’t want it too hot, you don’t want it too cold. The picture on the right is of in Venezuela in 2017 of the amounts of money needed to buy chicken. When you get to that sort of level of inflation, the economy really struggles to work.

So what causes inflation, there’s two main things. One is supply problems, which is called cost push. And the second reason is, is demand problems ie too much demand, which is called demand pull. Now, I would argue that the left-hand side the cost issue is usually temporary. The right-hand side is usually permanent. Just a very quick example, if you have a spike in oil prices that we’ve seen recently, that is usually a temporary effect. It’s not that common for all prices to continue to rise at that level year on year, which is what we need for inflation. However, on the right, such as things like wage growth, that is more of a year-on-year factor, so it’s usually a permanent issue. So what’s been going on at the minute? Well, this was a comment from central banks this time last year. And they’re all saying it’s basically a cost push issue, it’s all going to be temporary and transitory, which was a key word that they were using last year. And this is their forecasts from the Bank of England on the left and the Federal Reserve on the right for inflation over the next couple of years. And they weren’t really worried. They were saying that we’re going to peak at high twos this year, maybe get to 3%.

So what’s happened? So two obvious things have happened. One is obviously the war in Ukraine, and the impact of COVID restrictions in China that’s affected supply chains. So you can see from various different charts here, on the left, we’ve got commodity prices spiking, in the middle we’ve got gas prices. And on the right, we’ve got shipping container prices. And I don’t have to tell you that all of these have spiked quite sharply in the last year, it may be interesting to know the gas price in the middle, the US has been quite insulated from what we’ve experienced in Europe because they have their own gas supplies. So it’s not been quite as apparent from the US situation. In the UK, this is the ONS’ latest data as to what’s driving inflation in the UK. And you can see the two biggest areas of impact has been housing and transport, which is primarily electricity, gas, fuel, and things like petrol prices and diesel prices as well. That’s the kind of the maroon colour and the light, the greeny blue colour as well. They’re the two dominant factors of inflation. So that still suggests that’s still a cost push issue that it’s a supply issue that’s driving inflation at the minute.

So what’s happening. So this is a chart showing what investors think interest rates will be at the end of 2020. So you can see in the middle of 2021, investors weren’t thinking interest rates, were really going to go anywhere, for 2022. And you can see that big spike in the last six months that investors now think interest rates in the UK and US will be between two and two and a half percent at the end of this year. Now, this is not the right time, in my opinion to be raising interest rates because with the economy slowing a little bit in the US and the UK, you want to be raising rates in a in a strong momentum, part of the economy not when we’ve got a slowing economy, you want to be raising interest rates before we have inflation spike, not when we’re having an inflation spike. So I already think that the central banks have made a policy mistake but they’re too late to the party to affect inflation as we’re seeing it at the minute.

And if you look at what the Bank of England are projecting as well, the left hand side is if we kept interest rates at half a percent. This is what the Bank of England think inflation will do in the next few years. On the right hand side is if interest rates go up as expected. So they go to two, two and a half percent later this year. And you can see that inflation doesn’t really change, which again suggests that it’s cost push still that the Bank of England are thinking is driving inflation, because rising interest rates in the UK doesn’t affect food prices, it doesn’t affect the price of oil, so they’re still thinking inflation is going to fall irrespective of what they do to interest rates.

So what are they saying now? So both the Bank of England and the Federal Reserve, and now talking about something different, both of them are talking about wages. Especially Jerome Powell in the US who sounds almost like he’s panicking about levels of inflation at the minute. So why are they getting really concerned when everything is suggesting that it is still cost push inflation is coming down. So this chart looks at wage growth in the US over the last 40 years or so. And you can see in the 1970s, when we had high inflation previously, whilst it was started by an oil shock with OPEC, it was actually wage growth that caused the high inflation levels in the 1970s, since we’ve had wage growth pretty much under control, but you can see wage growth is now spiking again. Now, what causes wage growth, so this chart on the left is from the UK. So this is things that affect wage increases year on year. So we have things like productivity, productivity has been pretty poor in the UK, for probably two decades now. We have slack in the labor market, we don’t have any slack anymore in the labor market. The main driver is inflation expectations. Because if you think inflation is going to be 7% a year for the next few years, you’re going to want a 7% pay rise. If you think inflation is going to be a 2% a year for the next five years, you’ll be happy with a 2% pay rise. On the right, you can see the expected pay rises for 2022, which is nearly about 5%. So we’re definitely having a spike in wage growth. Now, this is looking at expectations over 5 years and 10 years in the US, concentrate on the blue line, the blue line is inflation expectations over the next 5 years on the left and 10 years on the right. And you can see that whilst inflation expectations have been rising, they’re still around 3% level. So in the US, they expect inflation to be about 3% a year for both the next 5 years and 10 years. So investors are still thinking that central banks have inflation under control, we’re not going to have inflation of five or 6% a year, like we’re seeing at the minute for the next 5 or 10 years.

Now, what does it matter if interest rates go up anyway? Well, a big impact is on the consumer and in particular mortgages. So on the left hand side, you can see the 30 year mortgage rate. So a lot of US mortgages are fixed for 30 years. And you can see that rate is now at its highest level in over a decade. But there’s been a big change in the mortgage market both in the US and UK. The chart on the right shows the amount of floating rate mortgages versus fixed rate. In the UK now only about 20% of mortgages are floating rate that is affected by interest rates. Today, the majority is fixed rate mortgages in the US its about 5% of mortgages are now floating rate. So that impact of rising rates doesn’t have the same impact on the consumer anymore. Also, the consumer is actually in pretty decent shape, partly because of COVID. So in the US consumer deposits are about two and a half times higher than they were pre pandemic. And the cost of servicing debts is pretty much at an all time low. So the consumer both in the US and UK isn’t actually in pretty good shape. Now markets have taken fright by the panic that central banks seem to be going through at the minute. So three areas that we invest quite heavily in three of the bottom lines. So the blue line is the US technology sector, the NASDAQ. The grey line is the smaller companies sector in the UK, that’s all sectors. And the green line is smaller companies and healthcare. All three have been hit quite hard. The red line is the UK large cap index, which is full of things like mining oil and gas banks, that’s actually done quite well.

But inflation should actually be pretty good for companies for profits. The chart on the left shows that higher levels of inflation usually means higher levels of earnings growth. And so far this year, we’ve seen good levels of earnings growth both in the UK and US. In the middle, expectations for earnings are still quite strong this year and next. And on the right hand side is a measure of expensiveness of markets and you see that most markets do look quite cheap still at the minute. So what we’ve been doing this year to date, is we’ve been adding a bit more diversification into portfolios. Because whilst we don’t think inflation is actually going to be as scary as everyone thinks at the minute, and rates probably won’t get to where central banks are expecting. The risks have increased. So we’ve added a bit more diversification. So these are a few examples of things we’ve added to portfolios. So in the top left, we’ve added a energy storage fund which is battery storage, which helps balance out supply and demand in the power grid in the UK. The top right is a firm called Aspect that does a thing called managed futures that should protect us if we get soaring energy prices, we have added things like infrastructure, Greencoat UK wind owns wind farms around the UK. And we’ve added two commercial property companies as well, that has really strong inflation protection. So just to summarize, central banks are definitely playing catch up. The issue of central banks we’ve seen at the minute, they’re very dependent on short term data. And we can see inflation spiking. They’re way too late to be raising interest rates to affect this inflation spike we’re seeing at the minute. I think, as we go through the year, and the data on inflation might soften somewhat, especially in the US, that impulse to raise interest rates is going to weaken. The Federal Reserve meet today. And we’re expecting a half cent rise in interest rates, it’s going to be interesting to see what happens later this year, if they do get to that kind of two and a half 3% interest rate that people are expecting. Inflation expectations, we think over the longer term should still be around 2% to 3%. That inflation fear at the minute I think is at its peak levels. And the UK is slightly different because we’re going to have an impact on energy later this year with the October price rise again, we’re going to see, but next year is the important year for inflation, especially in the UK, we’re going to need another shock from a supply point of view to see inflation at these sorts of levels again. Consumers we think are in good shape, they still have lots of savings, and wages are picking up. So whilst this year might be tough because it’s a big impact on consumers that aren’t used to such big rises in their energy costs and fuel costs, we still think consumers are okay to kind of weather this storm. Markets are pricing in quite a lot of bad news at the minute. So valuations on the whole look quite attractive. But no one’s perfect. And we appreciate that we might be wrong. So we’ve added a few other assets into portfolios that should help protect if we continue to see volatility in markets. So with that, I’ll hand over to Tim.

Tim Kirby

Thanks Ben, really interesting stuff there. Right, so we’re gonna talk about the eighth wonder of the world. There’s a famous Albert Einstein quote of many years ago, that compound interest is the eighth wonder of the world and he who understands it earns it and he who doesn’t pays it. So really, really important part of the planning process and for us, it’s very much get ahead early and if you understand how powerful compounding can be, and you do start at the right times and contribute to the right things, then this could really be your friend for the future.

So I’m gonna look at an example of the good. So here, we’ve got a very, very simple example of £1000. And if that earns 5%, then at the end of year one, you’re gonna have £1050 pounds, you made £50 pounds on your £1000 with that 5% growth. Now, if we then invest the £1050, for another year, and again, at 5%, suddenly, we’ve got £1102.50 pounds, so we’ve made £52.50 in the second year, ie growth on growth. Let’s play that out for a 10 year period, again, 5%, simple growth, suddenly, at the end of year 10, we’ve got £1629, so almost 63% growth or 6.29% per annum ,simple. Really powerful the fact that, you know, 5%, growth on growth actually gives us that 6.3. Now, I always say to clients, actually kind of the ultimate is 7%. If we take 7% out per year, for 10 years, actually, you double your money every 10 years. So it can be a really, really powerful way of getting growth on growth. And that sort of really understanding the good of compound interest. But it’s not all good. There is the bad. So a couple of lines on this chart, the first line, the orange one, and this is looking at £100 of cash. And if we’ve got £100 of cash, and the orange line is inflation of 3%, which is sort of around the levels that Ben was talking about expectations being and let’s assume interest rates remain where they are at the current time. Well, if we hold that cash for a period of 10 years, then at the end of that period, our £100 is going to be worth what £77 ish in terms of the real purchasing value of that money. Now, actually, if we look at where CPIH is at the moment, so using the measure that Ben alluded to earlier, and again, holding interest rates where they are at the current time if we do see long term, inflation sort of being very sticky at those levels, then that same £100 is actually going be worth about £45 in 10 years time. So you know compounding can be your best friend, can also be your worst enemy in particularly, holding cash in inflation periods with low interest rates can be very, very painful. If it’s held as an investment asset class.

I want to run through an actual case study. This is one that I came across sort of fairly recently, I’ve adjusted the figures ever so slightly just to simplify. But it’s an example of where we get asked lots and lots of questions when people first come to us. So this example, this is a snapshot from our visual financial plan document that we put together for clients. So working our way from top left, we’ve got a couple, both age 45, they’ve got a couple of dependents, they’ve got a house worth £350,000, they’ve got a nice, healthy emergency cash figure that’s more than enough to cover the boiler blowing up or any sort of short term emergencies. Husband and wife both work both got equal careers earning sort of £60,000 gross each, that nets down to about £7000 per month physically coming into their bank account. They’ve currently got a mortgage of £100,000, the interest rate 1.49% fixed, as Ben alluded to earlier, they want a long term fixed rate, and they’re overpaying. So they’re paying about £1000 pounds a month at the moment. So if we’ve worked that out, they’ve got 107 months remaining, so about nine years left on the mortgage. Recent times they’ve been having some surplus, and as with many people didn’t really know what to do with the surplus, they purely been piling it into a cash ISA and have built up £20,000 in that. They’ve both got a pension each that they contribute into alongside their employer. So 8% of salary goes into that. Some of it employers, some of it employee, and they’re both on track for full state pensions. So assuming they continue to work for a number of years to come, then they should benefit from full state pensions, once they get to the appropriate age, whatever that will be at that time. Nothing in the general investment account or buy to let or business interests. Pleasingly they’ve got some life cover in place, they’ve got a level term policy and critical illness cover, really important that you know, the debts covered as a bare minimum on the life cover side. But the reason this, this couple have come to us very much is on the inheritance side, they’ve sadly, they recently lost one of their parents, and they’re due to inherit £150,000. So very much the conversation was around, you know, what do we do with this? Do we pay down the debt? Do we not pay down the debt, what was kind of the scenario planning around that, and that’s why we were we were called in. In terms of expenditure, that expense was about £5000 a month, and that includes the £1000 on the mortgage. So you can see they’ve got a couple of £1000 net surplus per month. So at the moment, they’ve been putting that into the cash ISA. But again, what should we be doing with that in order to better our future? It’s kind of the next stage that we take people to is to very much look at the objectives, you know, what is it that we want to achieve in the future? And how are we going to kind of get there. So for this couple, ideally, they’d like to stop work at age 60, they’d like to be able to retire at a point where they’re still young, active, healthy enough, kids have flown the nest, they’re no longer a financial drain on their resources albeit probably will be a financial drain forevermore with house prices, etc. But ideally, at age 60, they want to be able to call it a day, and go and enjoy life and travel the world and do all of things on their bucket list. Ideally, they’d like to maintain their standard of living at the current time. So we talked about earlier, their expenditure being £5000, but £1000 of that is mortgage. So ideally, they’d want it to be £4000 a month, but in today’s money, so that needs to have some inflation proofing in there. As with many people, they’d love to be debt free. We’ve all kind of been bought up in this pay down debt mentality, and very much their initial thoughts with their inheritance, well lets bang it off the mortgage and be debt free. And very much as with everybody, they want to enjoy life, they want to be able to do the things they want to do and not worry about the financial side of things. We wanted to sit down with them and say it’s actually what are the risks of you not achieving those objectives. And I think many people the biggest risk, and the risk that we’ve very much see is they’ve got insufficient income to meet their objectives. They haven’t got that £4000 a month or whatever figure it is for them personally, then, you know, they’re not going to enjoy life to the level they want to. So that’s a huge risk. That’s something we’ve got to work with people to make sure we can, we can mitigate that to the best level we can . Inflation at the moment is a huge risks. You can’t pick up a newspaper or turn the news on without hearing about inflation and the soaring levels and all the things that Ben talked about earlier. Another risk is early demise. I sadly went to a family funeral yesterday for an auntie who who passed away at 62. Thankfully, she planned well, and therefore her family are looked after in this sad situation, but that’s something that needs to be sorted, to have a plan in place in case that is something that comes down the track and affects us. And in terms of risk. And I think this is probably the area that most people think we talk about risk is investment market risk. This couple are very much medium down the line very much sort of five or six out of 10 on the risk spectrum, something that need to be considered, how comfortable they are with the risk that they would take with any investment they do.

I’m going to play out a couple of scenarios. And this is very much the first scenario is what they thought. And then the second scenario was me trying to put a different spin on it and say, well, actually, how about if we look at doing things differently? What will that change in in the future? So their initial thoughts were, well, let’s use £100,000 for inheritance, we’ll pay off the mortgage, we’ll keep saving into our cash ISA because it’s secure, we know we’ve got it, we’re liquid, it’s comfortable. And we’ll look at taking our pensions from age 60. So we’ll retire then under pension legislation, we’re able to, but very much, as I said earlier, keeping liquid. So we’ve got cash available, should it should it be needed. So we’ve had a couple of cash flow scenarios for this couple based on that. So the first cash flow scenario is looking at future income. So the black line running horizontally is their expenditure. So this assumes they paid off the mortgage, therefore, their expenditure is £4000 a year. Anything that runs level ie. inflation proof will be at a level line, anything that’s not inflation proof will reduce over time. So actually, we’ve inflation proved income, state pensions, inflation proof, etc, we can see, during the working years, they’ve got plenty of surplus, they’re comfortably ahead of their £4000 target. At age 60. They take their tax free cash on their pensions, and they start to draw an income. So again, at age 60, they’ve got enough income. But from 60 onwards, these light green bars are them spending capital. So we can see actually, from age 61 onwards, they’re going to have to eat into capital in order to meet that £4000 a month objective. We’ve got some pension incomes from their SIPP’s that they’re saving into from their employer contributions, employee contributions, and then state pensions kick in from age 67. However, the really worrying thing here is that we’ve got a big chunk of white, which basically means we haven’t got any more income or capital to cover that income requirement. And that can be seen from the capital chart. So what does their capital look like, during their working life, as you’d expect, they’ve got surplus, they’re saving that. So their capital is growing quite nicely, they hit age 60 and start spending capital. And you can see that actually, they’re spending it very, very quickly. And we’ve then got an overdrawn facility here. So actually, they’re in the negatives as they continue to spend that level. So not a particularly attractive situation to be in. Yes, they’re debt free. Yes, they’re saving their surplus. But thinking about the future, they’re not working their money. And that compounding effect of working their money isn’t in their favor. It’s the negative because of the cash.

So I said to them, actually, well, let’s look at a different way of looking at things. So let’s accept that the mortgage is going to be paid off in nine years, we’ve got a really low fixed rate. Yes, we might have to revisit that in the future. If/when the fixed rate comes up and look at where they are, but because their loan to value is going to be so low, there should be some attractive mortgage offers available to them as a low risk mortgage customer to the banks. Let’s just carry on as we are paying £1000 a month, except that in nine years time, we’ll be debt free, we can afford it, we don’t need to pay it down any earlier, we’ll just live with that mortgage debt as is. They both earn £60,000 a year, approximately £10,000 pounds, that they’re going to be high rate taxpayers on. So under pension contribution rules, we can actually mitigate that higher rate tax relief, and we get 40% tax relief on that element. So let’s just look at using that £10,000 pounds of higher rate liability and get that into pensions to get 40% tax relief, what a great uplift on the money straightaway. We’ll utilize ISA’s as they have been with their surplus income. However, we’re going to take a balanced approach to this now, we’re no longer going to be cash ISA holders, we’re going to have cash as an emergency fund as they’ve got at the moment. But we’re going to get any ISA working for them to try and grow the capital to give them another income source later down the line. And once they reach that retirement age of 60, we’re going to start to look at drawing a nice tax free income stream from the ISA’s. So what does that look like from an income perspective? We do these very simple planning things with their money. Well, I’ll start off by saying it’s not perfect yet. There’s still work to be done here. During their working life, again, they’ve got surplus, you can see that actually their expenditures a bit higher for the next nine years when it’s still got the mortgage and then drops down to the £4000 a month figure. At age 61, actually they’ve got a huge amount of surplus because their tax free cashes are a lot higher because we’re putting more money into pensions so we’ve got a bigger pot of which to access. And then the other big difference is going forward is this light green is now the ISA income. And then we’ve got our pension incomes and our state pensions on top. But there’s still some capital expenditure required during those early years of retirement. So we’re still going to have to spend some capital to meet that £4000 requirement. We’re still not quite doing enough on this to meet their ultimate objective, but we’re pretty damn close. And actually throughout later life. We’re doing pretty well, it’s only in the back end of the 80s and in the 90s, where we’ve still got a little bit of shortfall. So just by doing some very simple planning for these, we’re starting to meet that income objective, from a capital perspective, actually, it’s a lot more attractive, we hit the million pound mark during their working lives. And broadly speaking, we stick around there throughout the rest of life. Back in the late 90s, we’ve got a little bit of capital expenditure at that point. But actually, that says to me that there’s some ability to cope with that capital expenditure to support income requirements. By spending a bit of capital during those early years, when we’re more active, we want to take the long haul flights, we want to get out of the bath and do more things. So puts you in a much stronger position to accept a bit of capital expenditure early, and that might reduce the capital later in life.

So just some conclusions on that, as I mentioned at the start, compounding could be your best friend or your worst enemy. And making it work for you is really, really important and not trying to work against it. Very much challenge the norm. I say this a lot to clients, we’ve all been brought up in this have cash, pay down debt sort of mentality. We’ve been living in a big period where interest rates have been very, very low and inflation has been above the rate of interest, therefore cash is hurting you and debt is cheap. Now, yes, there may be a change at some point in the future that may well change. But certainly still, as we sit at the moment, inflation’s comfortably outstripping interest rates and therefore challenging that norm of, is it the right thing to do to pay down debt and hold cash? We’ve got to look at each person’s scenario in isolation and decide what works. Very much think about the future, decisions you make today can make a huge ramification to your future income and capital wealth. Let’s look at this, let’s scenario plan. It’s very much not a one off process. We don’t want to be doing this today and then ignoring it. We’ve got to come back revisit this in the future. There’ll be curveballs, there’ll be bumps in the road, things will change, we’ve got to make sure we continue to actively plan, and make sure it’s right and appropriate at any given position in life.

Ben Toms

Thank you guys for sending in some questions. I’m going to see what we’ve got. So we’ve got a question for Ben. Do you regret not being in oil and gas markets given the strong performance in this area in the last six months? Will you be looking to change your current strategy and diversify into these markets over the next six months?

Ben Wattam

I regret not having the performance of what oil and gas has done. But I still think oil and gas markets are very, very challenged. You may have seen the results from BP yesterday, where unfortunately, a lot of oil and gas is still being found in areas of difficulty from a political perspective. So they’ve written down their value in Rosneft, the Russian firm. You’d be stupid, not to say that you wouldn’t want the performance that oil and gas has done over the last six months, I think it’s still challenged. And the big thing that BP and Shell have got to do in the next five years, is they’ve got to increase their investment into renewables. Because in 15-20 years time, I don’t know what the state of oil and gas market is going to be no one really knows. But they’re probably going to be smaller than they are now. And our reliance on oil and gas is going to be far less. So they’re going to have to transition. I think it’s a huge risk. Renewables market is already very competitive. It’s going to be very difficult for them to maintain their margins that they’ve got at the minute from oil and gas into that new environment. It’s a big risk. We do like renewable markets, renewable energy markets, we showed a couple of examples we’ve got in our portfolio such as Greencoat, and Gore street as well. So we do like the renewables market but I think trying to play it through oil and gas is difficult and dangerous, I think. Also, we’re clearly having a spike in energy prices at the minute. If you think there’s going to be another spike next year and the year after and the year after, then oil and gas is probably going to be a good place to be. If you think energy prices will stabilize, and possibly for the next few years now is not the right time to be investing in oil and gas. And that’s where I think we’re going to be that energy prices will stabilize over the long term as supply will get sorted. So this is not the right time to be looking at oil and gas. Most of the things we’ve been investing in have been proxies on higher energy prices. So Gore street are a really good example, they make their money from volatile power prices. So we don’t need power prices to stay high. But if they are volatile like we’ve seen in the last six months, that’s where they make their money. Same with Aspect, the Managed futures asset, we will make money if energy prices continue to rise. But we don’t have a direct link, like BP and Shell due to the commodity price. Because the problem is if the commodity price of any commodity halves from here, it doesn’t matter if you’re the best copper miner in the world or oil producer in the world, your margin is going to get hit hard, and your total revenues will fall probably by half, you have no control over revenue and margins when you are a miner or an oil and gas firm. So whilst it’s been painful, we’ve had very little in oil and gas. Now is not the right time to be moving into it. I still think longer term, it’s a really dangerous place to be. So whilst it has been painful for where we’ve been, I still think it’s the right place to be investing if you’ve got a slightly longer term time horizon than six months time.

Ben Toms

Perfect. So another question is financial commentators suggest macro headwinds are continuing to strengthen, what will cause them to ease and how long is it likely to take?

Ben Wattam

There is a lot of macro headwinds, most of it is supply driven, whether it’s containerships, and the supply of goods from China, or energy prices that we’re seeing at the minute. Now, in the UK, as I said, we’re going to have another rise in energy costs in October. But it’s next year and I still think that, as I alluded to earlier, inflation over the long term, the concern is wages. This is why the central banks are moving now, because they’re concerned that wages are rising. That is what’s going to cause longer term inflation problems. Supply is usually a temporary factor because there are various things that happen whether it’s a substitution effect, consumers do different things. Whether there’s more competition that comes in, supply usually gets sorted. Now, I don’t know how long it’s going to take for supply to get sorted. However, I think most people last year were saying that it would be sorted this year. Hopefully it might get sorted later this year into next year, however, it will get sorted supply issues will get sorted it’s the demand side we need to look, it’s wage growth. So that’s what everyone’s concerned about this year that we have high levels of inflation, that’s going to stop consumers from spending as much disposable income as they had last year. So this year, there is a risk of that happening. But I still think we’re going to see growth in not just the UK, not just in the US, but in Europe as well. And emerging markets, I think there’s still going to be growth. There’s a lot of people saying we’re going to see stagflation, which is where growth stalls and inflation is really high. If we do see growth weakening a lot, central banks are going to stop raising rates. They’re very short term data dependent, as I said earlier, so there are macro headwinds, definitely this year but we need to be looking not just in the next six months, but what’s going to happen next year, next year is a really big one for inflation. If we see another year of 5/6/7 percent wage growth, then we might have proper inflation concerns. But at the minute, we still think wage growth, whilst spiking this year, will settle down in the next couple of years. I don’t know when those supply problems are going to sort themselves out, but they will. So this year looks a bit ropey from an economic growth versus inflation perspective. But over the next few years, we’re still pretty positive on that balance of inflation and economic growth.

Ben Toms

We have one more question for Tim. If interest rates go to 3% or 4%, does that change your opinion on keeping debt?

Tim Kirby

I suppose the short answer is, of course it does. The longer answer is, as Ben pointed out earlier, in his charts, a lot of people’s household debt, their biggest household debt is their mortgage, and the majority of people are on a fixed rate. So in the very short term, it probably won’t affect them interest rates going up in the medium to long term as those fixed rates come up, obviously, then we’ll be looking at loan to value and the competitive nature of the mortgage market. So will it affect decisions, then? Of course, it will, it will be a consideration. But still, cash isn’t an investment asset class that has been making people money and even at 2%/3%/4% interest rates, is that sufficient to achieve people’s objectives? I think that’s where we’ve got to kind of step away from, what is it as an asset class, what is it trying to achieve? It’s got to be the question that we’re asking. And if 2/3/4 percent is enough to achieve people’s goals, then fantastic. It’s an asset class we should be holding. But actually, if we’re looking for better and more than that, then we’ve got to look at alternative strategies. The debt angle needs to be taken into account. But it’s stepping away and saying, what’s our objectives? What are we trying to achieve? And looking at the different variables and rates at that given time to say, what is our best solution or best way forward at that point?

Ben Toms

Perfect. Thanks, Tim. So in terms of next steps, thank you all for sending those questions in, by the way. Our next webinar will be at 10am on Wednesday 3rd August. There’s a few contact details there. So if you have any feedback in relation to this webinar, we’re all ears. And if you have any questions in general, use those contact details there. If you have any recommendations for topics for the next webinar, let us know and we can always facilitate that. Thank you all for joining us today. I suppose the last thing to say is just enjoy the journey & thank you for listening.