Market outlooks

Hi all and welcome to our quarterly multi-asset webinar.

My name is Joe Smith and I'm part of the wholesale team here, multi-asset, looking after the governed portfolios, grips and GMAPs.

Certainly a lot to go through and Trevor will be providing an outlook for the world macro environment and what it means for our tactical and strategic asset allocation and our investment clock.

Should you have any questions, please do add them in the Bright Talk portal and we will endeavour to answer those questions at the end. Over to you, Trevor.

Brilliant. Thanks, Joe. Thanks, everyone, for sparing the time today. It's a quick overview.

A soft landing with geopolitical headwinds is how we see the current situation.

Structural inflation risk is back.

So we still believe we're in an era where you can get sudden inflation shocks as we saw after the pandemic.

Geopolitics is obviously the area at the moment that could suddenly push oil prices higher, but we're also seeing stronger than expected US growth.

With the Fed cutting rates, it could be that the world economy is stronger than people think in 2025, and that could also push inflation higher.

So inflation hedges are still important to us.

We think there's no such thing as passive when it comes to multi-asset.

And what we mean by that is you don't just have to invest in stocks and bonds in a multi-asset portfolio.

You can cast the net more widely, and we like to build extra resilience with real assets like equity, but also commercial property, which follows a different cycle sometimes, and inflation hedges like commodities.

We also like to be a bit more conscious about how much bond duration exposure we have.

And when yields are very low, we're willing to have quite low bond exposure versus other funds in our peer groups.

On top of that strategic approach, we have a daily tactical asset allocation approach, looking to add value as the market conditions evolve. What we've been doing recently is adding back to risk assets.

So we've been overweight equities most of the time since 2022 in the funds, which has added value.

We neutralized ahead of the summer, thinking volatility would pick up.

And during the various periods of volatility, we built equity positions up again. Currently, we're overweight equities.

Models suggest we should be even more overweight equities.

We're holding back a little bit on geopolitical concerns.

And we've also over-weighted, tactically, the commodity asset class as a hedge against some geopolitical risks we're seeing at the moment.

So we'll go through that in a bit more detail as we come through.

But you can see on the right-hand side, and we will come back to this, the investment clock, the current reading, that yellow blob, is in the bond-friendly bottom left-hand corner when central banks normally cut interest rates.

But actually, it looks like it's moving clockwise.

It's moving towards the soft landing quadrant at the top left when stocks do well.

Just a quick reminder about the different portfolios.

I haven't got a slide here on the grips, the retirement income portfolios, but here are the governed portfolios, Royal London's insured pensions accumulation range.

There are nine portfolios, you see them numbered there in that three-by-three grid.

It's set out that way really with workplace pensions and life styling in mind.

And so we have the adventurous, balanced or cautious journey if you like to retirement.

And you go from higher risk to lower risk funds as you go from left to right.

What we did in 2016 is we launched four of those nine portfolios as OICs available on third-party platforms.

Those are the global multi-asset portfolios, the GMAPs.

And as of now, with some changes to strategic asset allocations on the governed side, but also the launch of GMAP moderate growth this summer, we now have eight of the nine portfolios covered.

So, whether you're using insured pensions through Royal London, which allows your customers, obviously, your clients to be members of the mutual and benefit from profit share, or whether you're using third-party platforms, we have a consistent investment proposition.

If you look at the picture on the right-hand side, you can all do this yourself.

This is from Trustnet, and it just looks at GP6, the middle of the right-hand column there, and it overlays GMAP Balance, which has the same strategic asset mix and the same tactical strategy.

You can see, since 2016, very similar performance.

This shows you the same funds as a risk spectrum.

From left to right, you're going from lower risk to higher risk funds.

You're adding to risk assets and you're ending up in a pure equity portfolio.

You have to have pretty good eyesight, I'm afraid, to see what's inside the donuts there.

But what we try to do here is use the GMAP names left to right, and then within the doughnuts the governed portfolio equivalent, so we go from the annuity fund to GP3 and then we've got GP6 and that carries on all the way up to the pure equity portfolio which is like Royal London pensions global managed.

Performance is shown here since inception over various time periods for the governed portfolios and what you're seeing here is out-performance versus their composite benchmarks are also very cognizant of peer groups.

And if I look at the GMAP peer group, you'll see over three, four and five years, we're seeing strong performance, typically first or second quartile, but you will see a much bigger challenge over one and two years.

I want to make sure we address that in this call. And it's because we believe in broad diversification.

That broad diversification really helped performance versus peers in the pandemic aftermath when inflation spiked, particularly in 2022 when we had commodity exposure.

But it's been more of a drag in the last couple of years, mainly because it's been a time where people might say diversification, di-worsification, because stock markets have been so strong that having some of those assets in commercial property or commodities as a hedge has not actually caused short-term outperformance.

You will see that really explained, if you like, on this patchwork quilt, which looks at the performance of different asset classes in different calendar years.

If you look at 2020, that was a period again where we were behind the peer groups, because in 2020, the pandemic onset year, stocks were up 15% and gilts were up eight, and our multi-asset mix middle of the range risk was up five, because we had those things below the line there, property, commodities, and UK stocks at higher weightings than our peers.

But then you saw in 21, 22, we had a real comeback.

Commodities up 30% a year, two years running, UK stocks doing better, and that carried through.

In the 22, 23, into 24 period, property has been a drag.

So you'll know that commercial property got hit very hard by the mini-budget and is beginning to recover.

I might say more about that later.

Commodities also have come back a bit from where they were previously.

Why do we believe in the risk of inflation shocks?

What we're looking at here is different structural reasons why inflation could rise.

These include excessive COVID stimulus in a supply constrained economy, chronic commodity under investment as we transition to net zero, and on the right-hand side, geopolitics.

We think these things are all very much in play still, and this is why we think we're prone to further inflation shocks.

If you look at inflation over the long sweep of history here, this is a 100-year chart.

You can see when inflation spikes, you often get more than one spike, and I think we've seen the first of a period that could be more volatile, like the 1970s, and what we're seeing in the Middle East feels very much, unfortunately, like the 1970s.

When you have inflation surging, balance funds tend to underperform.

Now, obviously, for the last couple of years, inflation has been dropping, and that's been helping equities and bonds.

But this is a scatterplot of equity versus bond returns over the last century or so.

And you'll see in nominal terms, it's very rare for both stocks and bonds to fall.

On the left-hand side of your screen, there have only been four calendar years when that happened, one of which was 2022.

But if you adjust all of those dots for inflation and look at real returns, there have been many years when stocks and bonds both dropped in real terms.

And they've generally been inflation shock years like 1973-4, 1977-78.

Obviously, 2022 is in here, late 1980s, 1994.

These are all years where as a commodity investor, we knew those were times when commodities were doing well.

So commodities give you resilience against these sorts of inflation shocks that we think could recur.

The investment clock explains this as well.

So if you look at the business cycle, the stylized global business cycle on the left-hand side of your screen with growth and inflation, what we did when we developed the investment clock is we look back to the early 1970s and we looked at the peaks and troughs in global growth and inflation, we built this table of real annualized asset class returns.

And what you'll see is in stagflation, you get negative real returns from bonds and stocks, which is what that scatterplot was suggesting, and you get these very positive returns from commodities.

And that's one of the reasons that when we built our multi-asset funds, we included commodities.

And commodities, in fact, are one of the four asset classes that you'll see in the centre of the investment clock.

You go from bonds to stocks, commodities to cash as the growth and inflation cycles evolve.

So we certainly think that that broad asset allocation and an awareness that there are risks out there for further price level shocks is important.

See on the left-hand side, this is looking at 2022, how commodities performed versus stocks, commodities in teal, stocks in purple, and commodities were already doing well in the reopening but they got supercharged obviously by the oil sanctions on Russia and Russia invaded Ukraine.

We've certainly seen some strength in the oil markets in the last few weeks with concerns about an Israeli counter-attack on Iran and that's causing a lot of volatility actually in oil prices on a day-to-day basis.

On the right hand side we've got a much longer term chart looking at the performance of equities versus property and kind of defending if like the right of UK commercial property to be an asset class that we believe helps investors beat inflation.

That golden line is the total return from the MSCI UK commercial property index.

And you can see over this period, all the way back to the late 1980s, it more or less keeps pace with either UK or global equities, UK equities in purple, more similar to UK equities and global equities there in Teal.

And you'll also see, if you look closely, that the last couple of years, it's been more flat to sideways, while equity markets bounced back very strongly. We think that's a short-term difference.

You'll also see other short-term differences in favour of property. A good example would be the dot-com crash.

And again, it's on your screen there. It's towards the left-hand side of that right-hand picture.

We had a couple of years where, 3 years in fact where stocks fell about 50%, whereas that gold line just sailed right through.

So if you're kind of concerned about the valuation of equities and you don't want all of your eggs in one basket, having an allocation to commercial property makes sense and through a multi-asset fund is the best way to do that.

Looking at the diversification in a picture, I always think pictures tell a thousand words, on the left-hand side you've got a 60-40 passive balanced fund if you like, so 60% in global equities with most of that on Wall Street.

So Wall Street is now about 70% of the MSCI World Index.

On the right-hand side, you've got the bonds.

So, you can see if you've got falling inflation, falling bond yields and tech stocks seeing very strong earnings, you're gonna get good performance from a balanced fund.

On the right-hand side, you've got our more diversified mix.

We've got a bit more in UK equities.

We've reduced that over the years.

So now it's only about a fifth of the equity exposure, but that gives you a value tilt, a bit of protection against a technology crash.

You've also got the property in there, and again, we've brought that down over the years.

So, for this growth portfolio, it's 10%, it's typically less than 10% in most of the funds.

And you've got that pink square commodities, you've also got that orange square global high yield, and you've got a more controlled amount in bond duration because we think bonds are now at a two-way risk rather than the permanent bull market.

So enough on strategic asset allocation, let me come around to tactical views.

And this is where we think the investment clock is moving around from reflation to recovery.

So, in common language, that is a soft landing, not a recession.

The way we do our tactical asset allocation, this is a day-to-day process.

So strategically, we review asset allocations when we update our capital market assumptions on a quarterly basis, but we typically make changes about once a year.

Tactically, we review the portfolios every single day.

We have a one-hour meeting at 10 a.m. By 11 a.m we’ve decided what we're doing and we implement it using very low cost futures and forwards and we've got these different strategies, cross-asset strategies, currencies, regions, sectors, credit.

All of them have a research-based framework based on a range of factors like the investment clock tested over a 30-year period typically and then they feed into this panel of experts if you like on our team who can understand you know what the models are saying and whether there's something in the environment that means we should do something slightly different.

I mentioned at the beginning of the call at the moment we've added more to commodities than our models suggest as a hedge against what's happening in the Middle East for example.

There's a very kind of structured process, very team-based process with a lot of the work done in the research part of the process.

If you at the simulation of our current suite of tactical models back to 1992, this is what the added value looks like over time.

This is not the attribution of any particular fund, this is the current suite of models that we're using back fitted and this is the reason we believe in them. So we've got a broad range of inputs.

This particular simulation over 31 years would have added about 3% a year of added value.

We always like to be quite conservative when we think about added value we normally say to people we're trying to add a percent a year but this certainly suggests to us we're on to something that should help us to make good decisions. So, what should stock markets do at the moment? Well if you like the business cycle, the global business cycle is the real driver of bull markets and bear markets the global stock performance to bonds which is in purple to the US unemployment rate cycle which is in teal.

So what we're seeing in that teal turquoisey line, it's just the US unemployment rate, but it showed upside down.

So on the right hand scale, currently, the unemployment rate is about 4%.

And normally, what you find is when there's a recession in America and unemployment's rising, so that teal line is falling on your page.

Stocks are underperforming bonds. It's a bear market.

And in a recovery, when unemployment rates are gradually declining. So that's the teal line rising on your page. It's the bull market.

So very, very simple chart. It goes back to the late 80s.

There'd been one, two, three, four, five, six, seven, eight turning points maybe so far.

You'd probably pick the same turning points and they've all been turning points in the unemployment rate.

It's really interesting at the moment because you can see on the very right hand side of the screen, the jaws are opening up. The unemployment rate in America has actually been edging higher.

That's that teal line dropping, and yet stocks have been going through the roof.

So what's happening?

And this really is coming to the core of this whole worry that we've seen in the last few months about is there going to be a recession in the US because unemployment rates are rising.

When we look at the broader sweep of data, we have Melanie Baker on our team every day feeding in her view of what's happening with economics.

We see actually pretty strong data in the US.

There's an Atlanta Fed Nowcast service that's quite widely quoted.

that's looking at two and a half, maybe 3% growth, which is pretty sturdy.

We think what's happening with the unemployment rate is a distortion of the post-pandemic period, where actually what's driving unemployment higher isn't job losses.

It's actually an increased number of people who are available for work.

So it's people coming back into the labour force who maybe were scared out of it for one reason or another by the pandemic.

In America part, this is also immigration.

And so you're seeing more people available for work versus the jobs, and that's what's causing the unemployment rate to rise.

So we don't think this is a US recession.

But this is the chart, if you like, that's helping the Fed feel they ought to be cutting interest rates.

So you're getting a situation where the Fed is ready to cut, but we don't think there's a recession brewing.

Now, this makes things really interesting, because if you look back through history at the times that the Fed has cut interest rates, it hasn't happened that often.

So I'm going back here 40 years and this is the ninth easing cycle in 40 years and I've shaded them all in here.

This was an evening's work.

It was great fun.

I was going through month by month working out when the rate cuts happened and when they ended and what I've done is I've shaded in pink the Fed rate cuts where there was no recession and I shaded in grey the Fed rate cuts where there was a recession and the recessions were the 1991 recession, 2008, I missed one, dot com 2001, and then a brief recession, but very deep with the COVID lockdown in 2020.

And so what I wanted to know is what do different asset markets do in the Fed's cutting rates?

And it doesn't matter whether it's a soft landing or a recession.

This table of numbers sort of summarizes all of the data.

And again, it's colour coded.

So the pink ones are the soft landings, I've called the mid cycle here, and the grey ones the recessions.

And if you focus in on the bottom right-hand corner on the returns, in a recession you're getting a drop in stock markets.

In fact, it would be a worse drop than it looks here if you excluded the 45% return from stocks around the period of 1990.

It was a 40-month period of rate cuts. There was a recession in there, but there's also a long period of recovery.

So, in the recessionary bits, you've got these minus 23s and minus 26s, minus 36 rather, and minus 11.

So basically, in the recession, you get a drop in stocks.

You generally, again, with the exception of the 1998 period, you've got a drop in commodities and bonds doing well, really well.

And in the soft landings, you've had 26% average annualized return from the S&P 500, and also 26% return from treasury bonds and also commodities going up.

So, the mid-cycle rate cut periods are very much risk on.

Whether bonds will give you 26% per annum from here I don't know because a lot of rate cuts were priced in very early.

And I think the macro data is going to appear stronger sooner than people think.

So I'm a bit sceptical about how long this period Fed rate cutting will actually last.

I'm making comparisons with the smallest baby of the rate cut cycles in that table, which was the September 98 period.

Those were the rate cuts after Russia devalued its currency and long-term capital management went bust.

They only lasted three months before you knew it, the dot-com bubble was upon us, and the Fed had to raise interest rates again. I kind of wonder whether actually it's going to be a bit like that.

So, again, relating this back to the investment clock and the investment clock research, when you're in a period of falling inflation and the Fed is cutting rates, typically government bonds - they are circled and blue do well, but for stocks, it's really binary.

If you're in the reflation, if you've got growth weakening while this is going on into a recession, then stocks generally drop.

But if you've got a disinflationary period with growth okay and picking up, then you get the best returns of the business cycle for stocks.

So the macro, in my view, looks really quite positive still for stocks.

And you can see the investment clock where it currently is, and we showed this briefly at the beginning, that yellow dot heading upwards on your page is growth improving.

Some of this has come from the better labour market data recently and better business surveys in the last month.

We expect that to carry on as more central banks cut interest rates.

So we think the clock is getting out of reflation towards recovery, and that makes us quite bullish. Well, one of the things that could boost growth from here, the main things are stimulus.

So one is that central banks are cutting interest rates.

This graph looks at global GDP growth there in purple.

And that indicator, which we show pushed forwards by 18 months there, the bar chart, that's just looking at whether central banks have been raising or cutting interest rates over the last 12 months.

And the way to read that, that big negative mark of bars around about 23, 24 was reflecting all the rate hikes we saw a while ago.

But because rates have been on hold for about a year, and now you're starting to see the Fed, the Bank of England, the ECB cut rates, that bar chart's turning positive.

It's not a bad predictor of the swings in the business cycle.

If you cast your eye back over the period, you'll see when that teal bar chart is positive, it maps up with a peak in growth and when it's negative it maps up with a trough in growth.

And that works pretty well in the period up to the financial crisis since which time interest rates were stuck at zero, so you weren't really seeing anything going on here.

I think this is not a bad way of thinking.

Central banks are now cutting interest rates.

It's going to reinvigorate the business cycle so we could see growth pick up.

Another possible stimulus here is China.

A bit of scepticism about whether the Chinese authorities will do what they need to do because because they're quite worried about the amount of debt, not just the government debt they've got, but also housing related debt and local authority debt.

And so there's a history of the Chinese authorities saying they're going to do something big and then disappointing the stimulus.

But you can see this graph looks at Chinese consumer confidence in purple, it’s rock bottom that's been there for years.

The teal line is the Shanghai Stock Exchange Composite Index, the CSI 300.

And you can see it thinks there's something going on in a massive surge, as you know, in Chinese stocks.

I think they'll do something.

Maybe they won't do as much as the stock markets are fracturing, and I really don't know.

But they'll do something.

And if you've got the big central banks of the world cutting interest rates and you've got China doing some kind of fiscal stimulus, we'll find more out at the weekend, those are both boosts to growth and could help push the clock into equity-friendly recovery.

China stimulus could also help boost emerging markets.

we've been overweight Japanese equities for most of the last few years, certainly in 2022, 2023.

And one of the things driving Japanese equities to outperform the emerging markets was the weak Japanese yen. And the yen is the teal line on this screen.

And if it's rising on the screen, that's a weakening yen.

And you can see how that explained quite well the performance of Japan versus the emerging markets in purple.

That's turned around a bit because the yen has been strengthening, they're raising interest rates in Japan, they're dancing to a different tune.

And at the same time, the stimulus that's coming through in China is helping emerging markets. At the moment, we're actually overweight emerging markets, not Japan.

We're entering the seasonally best period for stock market returns.

So, over the summer, you normally get greater volatility. Q4, Q1 is when stock markets are usually strongest.

On your screen here is the average stock market profile over the last 40 years, and you can see between May and September, global stocks are returning almost nothing, plus 0.5, and all of the return historically has come Q4, Q1.

So, you normally get some volatility, September, October, we've been seeing that, and then typically you get a pickup in markets, and this is aligned with what the investment clock is suggesting ought to be happening as well.

What are the risks?

Well, clearly, we're at the time of year when you do get a lot of volatility, and there are some clear risks.

And I'll highlight two of them.

The first of them is the oil price.

So, the chart here is actually going back a long way.

It's looking at the performance of commodities relative to bonds.

And you can see in 2022, commodities were doing really well versus bonds.

And what's explaining that is the global growth and inflation scorecards we use to power the investment clock.

And the macro at the moment isn't that pro-commodity.

growth picks up a lot, it will be, but it's not that pro-commodity.

There's mainly geopolitics that's been driving the oil price higher.

And clearly, a sort of war in the Middle East that brings Iran aggressively into play with the potential to prevent shipping getting through the Straits of Hormuz could see a big rise in the oil price, and that could result in a correction in stock markets, higher inflation expectations, a bit of a quandary for central banks.

It could really messy.

And the two big recessions in the 1970s were both centered on Arab-Israeli wars, the Yom Kippur war, and then the, well, second one was actually the Iranian revolution.

So this is clearly a big downside risk.

So far, the markets, the stock markets are not too concerned, but clearly you could easily see a lot of red on the screen if the oil price rises significantly.

That's why having commodities in our mix and being overweight commodities is a bit of a hedge against this particular risk.

The other one is what's happening in America.

And the presidential election is incredibly tight.

And you can see here the betting odds, if you like, is for prediction markets of whether Trump or Biden would win.

And in purple, you see Biden dropping out of the race and an orange Kamala Harris coming back in the race.

It's really, really tight.

And it's gonna come down to a few swing states.

And there's a lot of disinformation and nonsense being pumped out into social media frying everybody's brains, you've got people in America who think that the Democrats are making hurricanes hit red states, you've got all sorts of crazy, and that's a real one by the way, you've got all sorts of crazy conspiracy theories and it's really hard to know exactly how this is going to go.

So I think the markets could be really quite volatile heading into this because we saw civil unrest last time, there's even more civil unrest in America this time, which would be very destabilizing.

I think also the election potentially plays into the Middle East because Biden was asked the other day whether he thought Netanyahu wasn't agreeing to a ceasefire because he didn't want Biden to win the election. Who knows?

But it does feel like there's a lot of politics in pinching on short-term markets.

They don't tend to change the long-term direction of the economy.

So, we still feel bullish, but we think we could find ourselves with dips that we would want to buy.

And usually, our kind of guiding light, if you like, for buying dips is investor sentiment.

At the moment, it's sort of a bit weak, but not weak enough to say it's a contrarian buying opportunity.

We're looking here at global stock prices, and then in purple, our daily sentiment indicator.

And it gave us a strong buy signal in October 23, and another one on April 24.

And they were actually geopolitical events, obviously the October 7 attacks, the markets were already a week ahead of those, but that was the big sell off at the end of that week period.

And then April 2024 was the missiles between Israel and Iran.

So we could see again a dip, we're looking at this indicator to decide whether we want to commit more to equities.

We're holding back a little bit.

We've added a bit more to commodities, but this indicator will help us decide, do we go in again and increase equity exposure in view of what we expect to be a better 2025.

So current positions, moderately overweight stocks, overweight high-yield bonds, there's a question about that, slightly overweight commodities.

We are overweight emerging markets, we have been for a while, and then in terms of sectors we're underweight, the defensive bond sensitives like consumer staples and overweight a range of the more cyclically exposed sectors.

So on that note, I'll be very happy to take some questions. We've had a few come in.

Fantastic. That was great to hear such a comprehensive outlook on the world economy.

We've had a few questions come in.

I'll start on one that I get asked by clients a lot, which is obviously we hold more UK equity than sort of a traditional balanced fund, as that slide showed. So what is our outlook on UK equity at the moment?

Yeah, so we've done a lot of work on the UK equity market over the years.

If you look at the valuation, and we like to look at the, it's called cyclically adjusted price earnings ratio, where you look at price versus like 10-year average earnings to work out what the valuation looks like versus a smooth business cycle.

The US is getting as expensive almost as it was in the dot-com bubble. The UK market is still around its average of the last 30 years.

So it's definitely a value play the UK Hopefully not forever And it tends to do better either when technology is struggling or when commodity prices are stronger, and those are things that we think we want resilience to because we think we will see more inflation shocks. When I joined Royal London, 55% of the equities in these portfolios were in the UK. 40% of the market was there eight years ago.

We brought that down very significantly. So about 20% now is UK against a market cat way to five.

We think that's the right sort of strategic position to be backing, to give us a bit of a value tilt, but not to be betting so much money just on the home market.

Fantastic. And obviously, you touched a bit on bonds there.

And we had a question come through on what your view was on high-yield bonds at the moment.

Where do you stand with that?

Yeah, well, I mean, high-yield bond spreads are relatively tight, but I think that's reflecting the fact that the recession risk is actually quite low at the moment, and the spreads rose a bit.

The high-yield market dipped a little bit a month or two ago, but now we've seen quite a strong bounce back in high-yield.

I still think it's a decent asset class, and I think if you're in an economic recovery you’re not expecting a big pickup and defaults.

So, the real opportunities for high yield is when the spread is enormous, the depths of a recession, and the spread might be hundreds of basis points, and you can buy that and tuck it away and over a decade, the spreads come down.

We're not on one of those situations. So, I think that the outlook looks positive for high yield.

I don't think you'll shoot the lights out. Of course.

And obviously, the question that's on everyone's lips as investors the moment in the UK is what do you sort of think of the upcoming Autumn budget?

What will it mean for multi-asset?

Well I'm not going to talk about personal finance because it would mean a lot to, I mean you know I'll be teaching my grandmother to suck eggs if I try to tell a group of financial advisers about personal finance and we don't have any insight anyway into what will be in the budget so

In terms of the macro economy we are seeing this gradual recovery in the UK economy already, which is nice to see.

I don't think the budget's going to really upset that.

And it's hard to know exactly where we are, because we've got kind of mixed messages.

On the one hand, the sort of spin, if you like, is it's going to be a painful budget.

And if you're going to have a painful budget, you do it early in your political term. That points to tax rises and spending cuts.

On the other hand, there's a lot of noise around in the last few days about redefining the fiscal rules.

So investment is allowed and just this morning there was an announcement that HS2 is actually going to go to Euston. It was going to stop in somewhere in Northwest London. I can't even remember the name of, I'm sorry if you live there, Joe But it was going to be a crazy decision, you know, because you'd end up you know having to schlep across London after you've gone on a slightly faster train. They'll argue that's investment and that will pay off.

So I can't quite decide actually it might be more painful on the personal finance side, but actually, from the economy side, there might be more investment, do you think? And I don't think it's going to be that painful.

Yeah, of course. And we had a question saying, you mentioned bond being a two-way bet.

Is there any thought, I suppose, when you're saying that they might invest more on the potential for any other sort of Liz Truss style worries in markets?

Yeah.

Well, I think this might play into another question I saw on the US situation, I think fiscal is important too.

Yeah, there's a lot of bond issuance in the UK that's required, and there are lots of ways of changing fiscal rules.

And you can make things seem fine, but in the end, the real test is whether the markets will absorb all of the bonds you're trying to sell. And so you could see bond yields rise.

And UK gilts have been underperforming other government bond markets recently on concerns there'll be more issuance.

So in the end, the real test is how the markets behave. And that's not something you can really prejudge.

sometimes the markets are surprisingly relaxed about large amounts of issuance, sometimes they're not.

The Liz Truss moment was quite special, because it wasn't just the sort of increase in borrowing that was implied, and the lack of confidence in the forecast.

It was also the attack on the institutions, so the OBR and the Bank of England, there was talk of removing the inflation target, and the bond markets really just lost confidence in the framework.

And that is a bit different from what's happening at the moment.

Yeah, of course.

And obviously, there's a fair bit of property in the portfolios at the moment and hasn't been performing as well as you touched on, that's been a very equity-focused market.

What is your view on this asset class at the moment, I suppose?

I really like property as a diversifier.

And again, when I joined eight years ago, some of the funds had 17.5% property in the asset mix and I thought that was too high.

So, we've been bringing that down and typically the funds, I think the highest one's got a strategic weight of 11.7%. The most offensive is 5%.

And I think having 5% to 10% of your customer's portfolio in commercial property is a decent thing to do.

It's got a link with inflation through rents. It follows the UK business cycle.

And if for example we had a period where it was like 98-99 and technology goes through the roof and then crashes for three years, if at the same time the UK economy just gradually recovering, you're going to make money in the property.

So I think it is a good long-term growth deliverer. We've seen that it gives you proper diversification that you won't get in equity markets. Fantastic. We had a question through on Sterling here.

Does the Bank of England face a tougher dilemma with cutting rates amid stickier services inflation?

And this may help continue its recent strength. Well, Sterling's been strong.

And yeah, that could carry on.

And I think the reasoning there is absolutely right that the inflation has been a bit sticky here.

So the rate cuts are going to come a bit more slowly.

Fantastic.

One final question we'll take and if rates stay higher than currently priced in, what would be your expected target normal rates?

How low could those rates sort of go, I suppose?

I don't know. I'll take that one.

I saw a question I like better than that. There was one about longer term implications of who wins in Washington.

Yeah, of course.

So obviously, that's a question on everyone's mind inside and outside of investment, what would be the implications of Trump versus Harris victory?

Yeah, I'll say we will come back on that other question if you remind us, because I probably asked Melanie to help with that one, because it's more an interest rate forecast one.

Sure. So what are the implications of Trump versus Harris?

Well, what's really interesting to me is the bond markets have shown they can be really quite antsy when it comes to the mini budget in the UK. We saw it again with the French snap elections.

There was a period of worry there in the French bond market.

Depending on whether Harris or Trump wins in November, they want to spend or borrow, I should say, an extra one to five trillion dollars.

And they've got a big budget deficit and the markets aren't really punishing for it.

And I do think that, I think In Harris's case, she wants to spend $2 trillion, but she thinks she can raise $1 trillion in taxes.

But that would require the Senate to agree to things like corporation tax going up, and they probably wouldn't.

So the markets are saying she'd have to spend about $2 trillion and borrow that. Trump is $5 trillion.

Depending on who you ask you, some people say it's $7 trillion. No one really knows where you are with Trump.

Trump's talked about removing the independence of the Federal Reserve.

So I do think whoever wins, but I think particularly if it's Trump, you could get a problem in US treasuries.

And problems in bond markets don't typically happen when the Fed's cutting rates and inflation is dropping.

Look at Japan.

They could do what they like with fiscal policy and interest rates stayed low.

The problems tend to come like the mini budget riot at the end of a period where bonds are selling off anyway, and there's inflation picking up.

So if we go around the investment clock quite quickly and you get growth recovering next year and maybe inflation picking up next year, we get to springtime.

There's a need to refinance huge amounts of US government debt at that time, because a lot of five-year debt was issued in the pandemic, which is now five years ago and so Next spring, I think you could see problems in bond markets and that could spill over into technology stocks, etc So I do think there are you know the moment I sound really bullish on stocks I think I think you know springtime next year.

We're getting towards the selling main go away things could get a bit more dicey, particularly if there's an attack on the U.S. institutions.

Fantastic. Well, that's all very illuminating.

If we didn't get a chance to go through to your questions, my face with all the rest of the wholesale and institutional teams is on your screen now and we'll come back in the coming days with some answers to those.

Pleasure having you Trevor, for sure.

Well, my pleasure and we will come back on all the questions we've got, we'll make sure we come back if we can.

Absolutely, yeah.

Well, pleasure having you and that's everything for today.

So I'll leave you there.

Thanks very much.