The Investment Clock

The investment clock is a way of linking the performance of different investments to the global business cycle. We think about it in terms of a clock face, and where you are on that clock is determined by what's happening to global growth and global inflation.

For example, when you have a disinflationary slowdown, so weak growth and falling inflation, government bonds tend to do very well, because interest rates are cut by central banks, inflation expectations are dropping and all of these things boost the bond markets.

When interest rate cuts take effect, and you get an economic recovery, if it's still disinflationary, that's the best of all possible environments for stocks. Because when you've got a disinflationary recovery, you've got loose policy, interest rates are still low, but companies are suddenly making profits and share prices go up.

When growth is strong for too long, you've got an overheat. So what happens there is inflation starts to rise as commodity prices are going up, and there's too much money chasing too few goods. Central banks then start to raise interest rates, to try to reign in that inflation. And in that stage of the business cycle, the overheat commodities tend to be the best investment.

And then finally, of the four different stages of the business cycle, we have stagflation. Now stagflation is a slowdown, but, with inflation still high or rising. In stagflation, you've got an economic slowdown, the prospect of weaker profit growth from companies that Central Banks maybe raising interest rates and that combination tends to be pretty bad for stock markets.

Good afternoon everyone and welcome to our multi-asset quarterly webinar.

My name is Tom Cole and I'm a National Accounts Manager at Royal London Asset Management.

I'm delighted to say I've been joined by Trevor Greetham, Head of Multi-Asset for the session today.

Thanks for everyone's time, we hugely appreciate it.

So being the first webinar of the year, there is always a huge amount to talk through, so the plan this afternoon is to reflect on last year but also look forward to the year ahead.

We will cover some key areas including a performance and market activity update, where the investment clock is currently positioned, and what we see as the key opportunities and challenges for the year ahead.

There is certainly a lot going on in markets with the upcoming Trump presidency, ongoing geopolitical tensions across the globe, and the economic environment closer to home.

We are keen to make this as interactive as possible, so please submit any questions you have by the Bright Talk Hub we will get to as many as we can at the end.

So Trevor I will pass over to you to get us started. Thanks very much Tom.

I notice we've already got a question in so do keep the questions coming because we can see them as we go along.

We'll pick up on questions at the end.

So this is the beginning of a new period of puns about the word Trump I'm afraid.

So we call this presentation Economics to Trump Politics.

We mean that both in terms of the global economy and the US stock market where we see quite a positive macro backdrop at least at the moment but also bond markets.

We think bond markets generally being driven by economics not politics and that includes recent events in the gilt market.

We don't think there's such a thing as passive and multi-asset because as a multi-asset investor you can choose your asset classes and it's an active choice to invest just in stocks and bonds.

We like to diversify more broadly so we for example, commercial property in the governed range and in the GMAPs, and we include commodities.

And Royal London is the UK's largest commodity investor, that's really helped during the last few years, particularly the cost of living crisis with performance.

We're active in terms of the day-to-day tactical asset allocation, but also active in terms of security selection in the underlying funds.

At the moment we're tactically overweight equities, despite expensive valuations.

And as Tom mentions, there's a very uncertain geopolitical outlook, both in the US, Europe, and the Middle East. But we see fundamentals as being positive.

The investment clock you can see on the right-hand side of your screen, which we'll come back to again later in the webinar, is currently positioned in the top left-hand corner.

That's disinflationary recovery, and that's the environment when stock markets continue to do well.

We're overweight stocks underweight government bonds.

Within our stock preferences, we prefer the UK to Europe and Japan to China. We're more or less neutral to the US at the moment.

I mentioned commodities already. They're a hedge against unexpected inflation.

We'll talk a bit more about what we call spike inflation, a regime characterised by periodic shocks to the price level and what we think will be shorter boom-bust cycles. Where could inflation come from?

Well, partly, inflation has been quite sticky on the way down.

So a lot of service measures of inflation haven't really dropped as much as people wanted them to.

And inflation could surprise positively either because of strong US growth with Trump deregulation. It could be tariffs that push prices higher.

There could be interruptions to crude oil supplies in the Middle East.

All of these things could create a situation where inflation comes back.

And if at the same time growth is quite strong, that means investment clock could move towards overheat, the top right-hand corner of the investment clock and that would be a real challenge for bonds.

In that environment, I think it's not beyond the realms of possibility that we even see rate hikes this year from the Fed.

You heard it here first. Let's move on.

So if I go to the next slide, it's just emphasising the way we construct portfolios. We're an active house.

We have strategic asset allocation that we actively review.

So on a regular basis, we review the SAA, the strategic asset allocation, and we sometimes include new asset classes or make adjustments. It's not fire and forget.

We have the daily tactical asset allocation implemented through primarily low cost futures and forwards, then the security selection and underlying funds.

And all of our funds are active either in the sense they're actively trying to create added value for your customers or active in the sense they're trying to improve ESG outcomes.

So no passive, passive funds.

Just to mention about the name changes to the governed range.

A lot of people have known the governed range for a long time.

In its current form, it was created in 2009 with nine portfolios, a three-by-three grid of portfolios.

What we've done is we've simplified the governed range by renaming the portfolios and merging them together where they were very similar in terms of their risk level.

So what you have instead is names which are more descriptive about where you are in the risk spectrum from low through to high.

So I'm going to read them out.

They're quite small on the screen there, even for me here.

We've got GP governed portfolio defensive, then conservative, moderate, growth, enhanced, dynamic than a new governed portfolio, GP total equity.

So that was the equivalent of what's called the global managed fund, the equity vehicle for the governed range.

That is now a governed portfolio in its own right.

 

If you want to select a pure equity fund, we're reviewing it in the same way.

What's not changing is everything else basically.

So the aims of each government portfolio to try and generate maximum return after inflation,for a given level of risk, that's staying exactly the same.

So we can now show the governed range and also the on-platform equivalent, the global multi-asset portfolios or GMAPs, as this risk spectrum from left to right.

And what you've got is the different donuts there representing the strategic asset mix.

And then above the donuts, you've got the GMAP names, which are available on third-party platforms.

And below, you've got the governed portfolio names.

There are some slight differences which we're trying to iron out, so watch this space in terms of GMAP names.

Again, we may have to make some tweaks there, but the idea is that there'll be a consistent experience whether you're using the portfolios through the pensions platform or using a third-party platform.

And you can see the consistent investment experience on the top right-hand side of your screen there.

That's just a chart we just produced from Trustnet, and it's for what's now called Government Portfolio Conservative, used to be GP6, and you can see it launching there in 2009, you've got that steady appreciation, good risk, adjusted return, limited losses during the bear market periods, and overlaid on it in turquoise you've got the equivalent GMAP fund, which is GMAP balanced under its current name, and for more than half of the time you can see very, very similar performance.

Well, performance versus peers has actually turned out pretty well over the last year.

There was a point in the middle of the year when we thought that we were dropping in the peer groups.

This is looking at the IA sectors for the GMAP funds and we had a strong performance into year end, both in terms of added value from tactical asset allocation and from our broader asset mix, which generally means less in bonds.

Bonds have been a problem as you know.

So you can see here the one year numbers where we've got three of the four GMAPs there above the median for the peer groups.

Two year numbers also looking similar.

Then three, four, five-year numbers really looking quite strong and in particular I think that five-year number will stay strong because we had a very strong outperformance as you'll remember in 2022, again from having lessened bonds during that big bond crash and from having commodities during the great reopening which really helped with the inflation surge that we saw.

Moving on to the governed portfolios, you can download the slides and look at this in more detail, but this looks at the governed portfolios under their new names.

Just checking, it's under their new names that shows you the performance versus the composite benchmarks for lots of different time periods there and you see a general story about performance. So let's have a quick look at 2024.

I know it's already quite late in January to be reviewing 2024, but I'll be very brief on this because it really sets the context.

Our usual patchwork quilt here is now updated to include full the year 2024 on the right hand side.

So you're seeing different asset classes that we invest in across our multi-asset portfolios.

And you can see their total return, including income, to a sterling investor.

And it was a 20% year for global stocks in 2024, coming on the back of a 16% year the year before. UK stocks also up 10%. People are grumbling about the UK, but 10% a year is not bad.

Commodities up 7% and property up, says 5.9 but that doesn't include the December number so more than 6% beating cash.

The worst place to be, bottom right hand corner there was gilts and you can see the last four years gilts have been generally looking pretty ropey for some time so we'll talk more about gilts shortly.

Looking in more detail here on the left hand side you've got global equities in purple, year to date in sterling.

In gold, you've got the MSCI US index, so the broad index, and then in turquoise on the left-hand side, you've got the FANG Plus index, or the MAG7, as they're often referred to these days, and you can see they were up 50% over the year.

On the right-hand side, you've got different regional markets, and again, the US and turquoise best, Japan second, and everywhere else sort of also ran, but also ran with positive returns, including in the emerging markets, which aren't shown on there.

Looking at other asset classes, on the left-hand side, you've got government bond yields, 10-year yields.

The shaded area is 2024.

You can see, actually, yields have dropped to the back end of 2023 and they rose slightly over 2024 and they've risen further, as you know, in January.

So, bonds actually had negative returns for ‘govvies’.

On the right-hand side, you've got different commodity sectors.

It was a 25% year in sterling terms for gold, also central bank buying.

Let's talk about broad diversification and inflation resilience.

We have a process of reviewing strategic asset allocations, which tries to select a near optimal portfolio for different levels of risk, but we have a checklist.

We don't just let the optimizer choose something sitting right on the efficient frontier because it's often under diversified or offers poor liquidity.

We have a checklist of other things, including consumer expectations, capital market returns over the medium term, resilience to shocks, lots of different things we look at to decide what to do with the strategic mix.

Something we've really been thinking about recently is inflation and this sort of wheel describes the different factors we've been talking about for the last two or three years explaining why we think we're now in this more spiky inflation world.

And initially what kicked this off was at the top left there, numbered number seven, which was excessive COVID stimulus in a supply constrained world economy.

That's what really got inflation going.

And then number one at the top right, geopolitical risks, invasion of Ukraine kept it going.

We think a lot of these things are still very live and some of the things that weren't in force in 2021-22 are more in force now.

So we've got chronic commodity underinvestment for fossil fuels, quite understandably, as we transition to net zero, which means when you get a sudden pickup in demand for fossil fuels or an interruption to supplies, they move very quickly and oil has been very strong this month.

We've got de-globalisation and on-shoring, well Trump's tariff war is very much in that bucket de-globalisation.

Structural changes to labour markets, well in there I would put in Trump's deportation plans which will effectively say he's going to deport the entire agriculture sector as far as we can see.

I'm sure it can't happen but all these things tend to be inflationary.

High levels of debt, massive public spending programmes, populism, it's all happening and geopolitical risk hasn't gone away either.

So we still think there's a lot of potential risk to upside shocks to inflation.

And this is bad news for balanced funds.

If you've just got stocks and bonds in your armoury, normally when you have a year when inflation spikes, bonds do badly and stocks do badly as well, particularly growth stocks.

So you can see whereas in the last 100 years or so, they've only been four years where both stocks and bonds in America dropped in absolute terms versus inflation, there have been loads of them.

And that right hand picture is real US stock and bond returns for each calendar year.

And what that shows is when you've got an inflation shock, like in the 1970s or late 80s or 2022, both stocks and bonds tend to do badly.

This isn't surprising to us because we've worked on the business cycle and the investment clock we're thinking for about 25 years, actually, with data going back to the mid 70s.

And what we find is when you're in stagflation, which is when inflation is rising and growth is slowing, which is what happened in 2022, you normally see negative real returns from stocks and bonds and commodities are your saviour.

So having commodities in the strategic mix we think makes a lot of sense, particularly if you think one of the shocks you need to be resilient to is another price level shock.

And it so happens that stocks and bonds are actually amongst the most expensive asset classes you could choose from at the moment.

On the left-hand side, got the cyclically adjusted price earnings ratio popularised by Robert Shiller at Yale University for the US in orange, UK in purple, and Europe in blue. Sorry, Europe in purple and UK in blue.

And you can see that the US valuation on this basis is as expensive as it was in late 2021, and it's only second to the dot-com bubble, whereas UK equities there in turquoise, that bluish colour, pretty cheap actually amongst the cheapest valuations we've seen for the last 30 years.

So we know it, US equities are expensive because they're really massively delivering on earnings in the tech sector, but it is a risk.

On a five-year view, valuation is your best indicator of how much money you'll make and what this is saying on a five-year view, watch your eye with US equities.

On the right-hand side, we've got high yield spreads versus Treasuries in purple, shown there with a bank lending confidence indicator in turquoise, and we're now seeing the tightest spreads we've seen in high-yield bonds in decades.

The quality has improved, so there's still maybe some further tightening could come there.

We've got expensive equities, expensive corporate bonds, and if there's an inflation shock, it's a concern.

So we diversify more broadly. We've got commercial property in the mix I mentioned.

It's a bit of a Marmite asset class for some people, but commercial property is offering 6, 7% yields, which is at fair value, and government bonds with yields now at 4% or 5% are offering very clearly positive real yields, also attractive on a five-year view.

So my strategic portfolio would say, well, I like the UK equities, I like the property, I like the government bonds, and I will dial down a bit the exposure to US equities and to credit.

And you can see that coming through on the slide in a moment, which is this one.

On the left-hand side, I've got a strawman portfolio, which is a 60-40 equity bond fund just using market cap weights.

That massive square in the top left is your North America exposure.

I think you're better off with a more diversified portfolio, which would be government portfolio growth or GMAP growth on the right-hand side.

A bit less in equities, a bit more of it in the UK, less in fixed income, and you've got the commodities, high yield and property as the extra diversifiers.

The slide I skipped, I'll go back to, the left hand side just shows you commodities versus stocks, and 2022 in particular, how useful commodities were in turquoise.

Right hand side looks at UK global equities and in gold, commercial property, and people think property's done badly, and it has compared to equities this last period.

You can see that gold lines off its highs, but it's beginning to turn back upwards again.

It's an economic-sensitive asset class offering solid positive inflation-beating long-run returns and it's got good value, so absolutely including property in these portfolios we think makes sense.

Tactically, well having said all of that about stocks being expensive, I'm now going to explain why we're overweight stocks because although valuation is a great metric on a five-year view, there are other drivers on the shorter term and they're generally quite positive at the moment despite some of the worries around policy.

So we have a structured process for tactical asset allocation that starts off with research-led quantitative models like the investment clock and a range of other factors.

We test them over a 30-year period.

We work out the best way to process this information in real time and then we feed it on a daily basis into our multi-asset team meeting and we set positions and generally trading them the same day.

It's not day trading, it's daily risk management, daily reaction to any important news, but actually if you look at our holdings there's quite a lot of persistency.

We tend to be overweight something for a period of time rather than just a period of days.

This is the back test of the different quantitative strategies that underpin the approach we're taking and you can see most years it would have added values.

This is our touchstone really when the models we've worked on suggest to do something they should be the loudest voice in the room and that guides against the sort of behavioural traps a discussion based or a sort of star manager based process can create.

Well let's look at some of the factors that are suggesting we should be overweight equities.

The first one is actually people are pretty scared out there about what Trump will do.

What this graph looks at going back to 2017 is global equities in turquoise and in purple we've got the Royal London Asset Management Investor Sentiment Indicator and that's an Investor Sentiment Indicator that if it's kind of average it's a zero, if people are panicked it's a minus one and if they're really panicked it's a minus two.

You'll see in Covid they got really, really, really, really panicked and it went off the bottom of the graph, something like a five standard deviation panic in Covid and quite right too.

At the moment, we've got a two standard deviation panic because of Trump coming in.

We saw some pretty good dips actually to buy in the last two or three years where the syndicator helped us to buy.

And at the moment, it says, if anything, you should be looking at the glasses being half full.

When investors are panicking, you shouldn't ask what can go wrong, you should ask what can go right.

And there are many things that Trump has said, up to and including talking about threats that invade in Greenland, which in reality probably won't happen.

so we think the markets could recover just off the back of sentiment being very depressed at the moment.

Seasonally, the worst time of the year for stock markets is May to October. We're in the October to May period.

So to the extent that it works, seasonality is also positive.

And the business cycle, I mentioned the investment clock, is showing growth picking up, particularly strong growth in the service sector globally and in the US. And inflation is still generally quite low.

The most recent move of that yellow us to the right, which is the rising inflation direction, which we're keeping an eye on, and the performance of markets where commodities have been strong and bonds have been weak is also suggestive of inflation pressures.

But at the moment, it still looks very much like stocks can do well.

And usually in that stage of the business cycle, you've got central banks cutting interest rates and improving growth prospects, and that helps earnings and helps stocks as well.

Even though bond yields are rising, we think stocks can continue doing well if bond yields are rising because of stronger global growth and that's what we think is beginning to come through.

Talking about bond yields, I said that economics trumps politics and I mentioned that I was talking about the positive factors in the world economy that are there versus some of the threats that are being made by Donald Trump.

It's also very relevant in the UK where there's been a lot of commentary that the gilt market is melting down because of the budget.

Well, it's a little bit hard to sort of see the UK-specific effect here.

What we're looking at is the two 10-year yield charts.

One of them is the US there in purple, the UK's in turquoise, and you can see for the last year or so, they've been really hard to separate.

So I think what's happening is about global growth and inflation pressures, and therefore, people basically pencilling out central bank rate cuts they've previously had in, rather any kind of sense that there's a fiscal unsustainability going on.

We don't think that's the case at the moment.

You've seen actually this morning with better inflation numbers, the gill markets rallied, nothing to do with who's resigning and not resigning.

Global earnings have been revised lower, that's what this purple line shows, it's the earnings revision ratio from analysts.

Our growth scorecard is pointing upwards and we think that positive earnings revision is what will help stocks to get some wind behind the sails again in 2025, even though bond yields have risen.

Staying with our scorecards, if you look at our nominal growth scorecard, which looks at growth and inflation here, it's looking pretty neutral at the moment, but if commodity prices keep rising, I think you'll see our inflation scorecard could keep going up as well.

So commodities we think could continue to be strong, they can be quite volatile in the short run.

We're always a bit aware of that.

But we're overweight commodities and overweight gold where we can in portfolios at the moment because we think inflation pressures probably will build given our view about global growth actually starting to pick up.

And stimulus in China.

And some of that stimulus that's coming through in China is because Trump has scared the bejesus out of the Chinese government and that they're talking about putting stimulus through to offset some tariff threats.

The tariffs may or may not happen, the stimulus probably will happen.

So, you know, Trump's also talking about tax cuts, corporate tax cuts.

So there's fiscal stimulus as well as monetary stimulus being talked about at the moment.

Turning to other regions, Japan has been outperforming emerging markets very strongly the last three or four years.

That on this graph is the purple line, mostly because of the direction the yen has taken, which is the turquoise line.

You can see the yen recently has been weakening through 130 to the dollar.

And that says to us that Japan could keep outperforming.

So just sort of summing up before we go to Q &A, we've got quite a large position over weight stocks on a sort of scale of minus 10 to plus 10.

If you think about conviction that way, we're sort of plus eight.

So we're quite positive on stocks.

We've got room to buy a dip if there is a further dip at the moment.

We're slightly overweight high yield versus government bonds.

We're overweight commodities.

we're neutral commercial property for the last three years or so we would have said we're underweight.

So we've added some money in to bring property up to neutral because of a more stabilised UK economy, underweight government bonds and cash. We like the dollar.

The dollar is a hedge against Trump really going absent without leave and massively raising tariffs because the general reaction is there's a risk off but the dollar is strong.

So being along the dollar helps is what our models want to do anyway.

You can see the Japanese equity overweight and at the sector level, we’re still slightly overweight technology, mainly underway to the bond sensitive defensive sectors like consumer staples. So on that note, let's jump straight to questions.

We've got a good amount of time here for questions.

And we've had quite a few come through.

Right. Thanks, Trevor. Yeah, thanks very much for that.

And you know, certainly a lot to consider at the moment.

So yeah, we have had a lot of questions come through.

So if we pick up on one here about the US, so there's a lot of lot in the press about the US being overvalued and given the tariffs Trump is planning what makes us neutral on the US.

So let's talk a bit about the Trump policy and what's being talked about then what we think will probably happen.

I think it's one of his books, other people can read the book so I don't have to but there's one of his books where he talks about, it might be the art of the deal, but his favourite tactic is to open a door, chuck a hand grenade in and close the door again and then sort of wait for the explosion then enter the room.

 

And I think that's basically what his approach has been at the moment by threatening everybody with massive universal tariffs.

He's then thinking, well, I've got maximum leverage here.

And if we do something less, people will still think I might do something more and I'll get something out of it.

The whole thing is really hard to understand.

I don't think it's really about economic policy.

I've never really understood why Trump thinks it's a good idea to increase tariffs.

He was saying something a couple of days ago that he wants to rename the Internal Revenue service, the IRS in America, the external revenue service, because so much tax is going to come now predominantly from foreign companies paying tariffs.

Well, there were two facts in that statement, foreign companies paying tariffs, and so much tax will come from it.

It's going to be a tiny amount of tax, and it's US companies that pay the tariffs.

It's still internal revenue, Trump, not external.

But if you took it at face value, and you got these big universal tariffs, and if you deported every undocumented migrant in America, which is 9 million people, it would be something like a 9% hit to the US economy, which is two or three times bigger than the OBR's estimate of the Brexit hit.

So it's an enormous hit to the US economy. I don't think he's going to do all of that.

And I don't think he can even find the 9 million people he wants to deport. So I think you'll get stuff happening.

But maybe at the moment, everyone's really glass half empty and very worried.

And that's what the sentiment indicators seems to be saying. The models that we look at when they were looking at regional equities, they look at earnings revisions, valuation, and price momentum. And so there's nothing political in there.

The models have generally been very pro the earnings story in America.

They still are, but the market's not trading as well, partly because of rising bond yields.

Remember in 2022, when bond yields rose, the US was an underperformer.

So that's why we scaled the US back and scaled the UK up, which was our position then in 2022 and the UK was actually the best-performing market in the developed world that year.

Great. Thanks Trevor on that one.

Yeah, so we've got a question around US debt and refinancing. So, you know, interested in your sort of current thinking on that area?

Yeah.

Well, I'm a bit worried that we've had a series, having called this presentation economics trumps politics, and they're going to talk about politics and the bond market.

We have had a series of bond vigilante attacks, if you like, the last few years.

Obviously, in the UK in 2022, we had the bond market response to Liz Truss's policy, and some of that was just the Truss government delaying OBR reports, downplaying scrutiny, suggesting they might change Bank of England inflation targets.

There were all sorts of worries that people had at that time and you also had highly leveraged pension funds with LDI positions that they were forced to sell so the Bank of England had to step in.

But it was bond markets forcing a change of government effectively the way it turned out.

You also had the snap French elections that Macron called and then quickly regretted.

When they were called again you saw a big move out in French government bond yields.

Is America so different?

If Trump is talking about cutting taxes, allowing the deficit to balloon, is there a risk that bond markets start to worry about the US?

Well, you could argue that might be part of the reason for US yields rising the last few months. It could be.

The initial reaction after the election, though, of Trump was bond yields dropped. So I don't think it's really about that.

But the debate is going to carry on.

And as the questioner quite rightly says, we're heading for the fifth anniversary of the massive issuance of five-year debt in America for the COVID pandemic, so there's a lot of refinancing that needs to be done.

So I think the commentary is going to stay really focused on this being all about fiscal sustainability.

In reality, I think it's probably more about growth and inflation, and if growth weakens or inflation drops, I think you'll find these government bonds will rally.

Great, thanks.

And we've got a question on the emerging markets, so our underweight position and why that is, given the attractive valuations in that space.

Well, emerging markets are offering attractive valuations and we're more neutral emerging markets than we've been for a while.

We're just a little bit sceptical about how much stimulus we're going to get through from China.

Having said they're going to do stimulus, they've got a record of under-delivering stimulus.

So it's not our favourite region at the moment, emerging markets, for real  earnings reason.

Great and just yeah your view on growth prospects for the UK considering that we sort of historically have hold  an overweight in that area?

Yes first thing to say the UK stock market is not the UK economy and you know 70% plus of earnings come from overseas so the UK stock market is a bunch of mainly multinational stocks with a lot of resource exposure and lowly valued consumer stocks and banks.

So the way it behaves tends to be inflation resilient, and if there's a sell-off because of valuation concerns on rising bond yields, the UK tends to sell off less, and that's why we're overweight the UK.

The UK economy matters for property.

I mentioned we move property up to neutral from underweight, partly because we're seeing better price activity in the property market and it's offering good value, but we also think the economy has stabilised.

There was a mini recession around the time of the big increases in interest rates.

America avoided recession but in the UK and Europe we had mild recessions.

At the moment it's still not looking great.

Germany's in its second year of mild recession and with the tax increases, the corporate tax increases, national insurance rather, in the UK that's hurt business confidence as well.

So things do feel a little bit sluggish but interest rates are likely to still come down and if the US economy is picking up, partly on the back of corporate tax cuts, I think that will help.

So I'm not really bearish about the UK economy, but it doesn't feel great.

And regular listeners to our webinars will know, I usually say at this point, what we need to do is rejoin the single market.

If you really wanted to get growth going, that's what you would do.

But it's the one stone that the Labour Party will resolutely leave unturned.

They said they will leave every stone unturned to look for growth.

That's not a stone they’re touching.

And then if we move to to tech stock, so, you know, do we see a repeat a potential repeat of the dot-com crash?

Dot-com crash.

No, I do see some similarities actually with the late 90s. So one of them is in the late 90s, if you remember the Fed cut rates three times. Everyone thought they would need to cut rates a lot more than that there was there was the failure of a leveraged hedge fund, long-term capital management, and Russia devalued and there were things going on,but in the end, they only cut rates three times, and then they set off an absolute boom in the economy in 1999, and the dot coms in particular, and they ended up having to raise rates so much so they created a recession.

It's plausible that the feds cut rates here when they didn't really need to that much, because they weren't really wanting to cut rates because of economic weakness, or there were some wobbles over the summer.

They were saying they just thought rates were above neutral and they should cut them.

No one knows where neutral is, if you cut rates, you boost the economy.

So I think it's plausible that 2025 ends up being a strong economic year, if Trump underdelivers on some of the threats, and you've got this sort of animal spirits of deregulation, the tech bros all heading to Washington for inauguration, and you've got AI still booming away, it's possible you actually get another surge in technology, we're overweight at the moment, and you would worry about that if that resulted in the Fed hiking rates enough to kill the economy.

We're a few steps away from all of that stuff if it's possible but at the moment it's, you don't get there from here we think if you were to see an environment where the Fed were to raise rates between now and then you'd probably see much stronger stock market performance.

So certainly a lot to be positive about.So then if we turn to Europe so what's our view on rate cuts despite tariff concerns?

Yeah, so I mean Europe is probably most exposed to the tariff war.

The UK economy is more service-based than goods-based and it's most exposed to a possible resolution of the Ukraine conflict that might leave Russia empowered.

I really don't like the fact that Trump is joking or not joking, you never with Trump talking about not ruling out military action against Greenland and Panama, talking about, you know, forcing Canada to join America, because this just gives Trump, gives Putin rather an absolute free pass.

Because if America can say they want to make a greater America by just threatening small neighbours, well, it's okay for Russia to do it.

And it's okay for China to do it.

So I think the geopolitics at the moment is quite messed up and Europe is not great position there.

So Europe's been quite a big underperformer we still think it's not the best place to invest right now. Thanks Trevor.

Yeah and we just had another question come in.

So outlooks we've seen so far, overweight commodities, are we ahead of the curve on this?

It says are you ahead of the curve or wrong? It says all wrong.

Now we don't know if we're ahead of the curve or wrong, we could be both couldn't we?

We're quite able to adjust positions in a nimble way if we need to.

So we've been overweight commodities for the last few weeks, but most of last year we were pretty neutral or underweight commodities.

So it's something we will respond to. We're overweight gold.

Gold's been behaving rather strangely.

Historically, gold tends to do well when the dollar is weak and the dollar is strong. It tends to do well when bond yields are falling and bond yields are rising.

But what's happening at the moment is partly because of the geopolitical situation.

Many unaligned countries are buying gold because they don't really want to be holding loads of US paper.

So some of the geopolitics that's going on, the fracturing of the world, if you like, is resulting in a lot of central bank buying of gold.

I can quite imagine a situation where global growth continues to strengthen and that increases demand for commodities.

We don't know what's going on with Iran. There could be interruptions to crude supplies.

I can quite imagine a situation where commodities go a lot higher, but I can also imagine a situation where we get a disinflationary recovery mainly driven by the service sector, which isn't very commodity intensive and commodities could drop again, in which case when the momentum factor in our model starts to weaken, we'd find ourselves selling the commodities.

And actually an environment where commodity prices drop could be the most bullish for stocks because then the central banks are off your back, maybe the cutting rates a lot more. I think you'd get more out of markets if commodities drop.

But at the moment, the way things are moving feels a bit more like we're heading towards overheat sooner rather than later.

And that would fit in with our spike inflation thesis, and also with the idea that we think the business cycles have got much shorter than we've been used to.

When you had a disinflationary trend from the 1980s onwards, you had really long, sometimes 10 year or more, expansions between recessions, because central banks could always be your friend and  cut interest rates but when inflation's higher, stickier, prone to upward shocks, you're going to get shorter business cycles.

And Trevor, I think we just got time for one more.

So just looking back through 2024, you mentioned some of the contrarian views that we held, like what are the ones that we thought we got right and where we were sort of positioned against some of our competitors?

Well, the strategic mix we've got is quite different from a balanced fund.

So in terms of performance versus competition, it's often to do with that strategic mix.

And years when commodities do well, benefit us, years when bonds do really well, or US tech does really well, we tend to be lagging.

So over the periods we looked at in performance earlier on, I think it's quite gratifying that we're ahead of the pack, even though we've got much less in US tech than most of the competition.

So the broad diversification helps with also the active management.

The tactical asset allocation this year has been a little bit tricky.

37:23

So we ended the year, I think, roughly flat in terms of our impact over the year after two or three strong years, mainly because there were a few reversals in the summer. There was that very brief US recession panic.

There was a big drop in the Japanese stock market, you'll remember, when the yen started to strengthen. And around the US election as well, there was lots of reversals.

So there were some things where actually our positions got wrong-footed.

I mentioned momentum as a factor in the context of commodities.

We've got momentum factors here and there, and they basically did badly last autumn.

What we got right, well, we bought some of those dips quite strongly, which helped us.

And we were really quite significantly overweight equities through the week of the election.

I mentioned that sentiment chart, we saw how panicked people were ahead of the election and we bought on the Monday.

And obviously markets went up, US markets went up very strongly.

So that's helped us.

So most of this is model driven.

It's a consistent process.

It’s looking at things like the business cycle.

38:24

But there are occasions where experience and judgment can help as well.

And we've had a few good out turns there which have helped to offset some of the pitfalls of momentum.

Just to say the back of the pack here, just for reference really, we've got the current strategic asset mix for the different governed portfolios. So left to right as the risk increases under the new naming conventions.

And then for completeness, we've also got the retirement income portfolios GRIP on to five here as well.

Tom?

Great.

Thanks, Trevor.

And just as a reminder, we have lots of information available to you to help with your conversations with clients such as videos, reports, thought leadership, and these can all be found on the Investment Clock website through the link you can see on the slide there.

We also have a team that's dedicated to supporting you across the country so hopefully you'll know many of the faces on that slide but you know please get in touch if you have any questions and we'd be more than happy to help.

We'll get in touch with your Royal London Pensions consultant as well.

Certainly yeah so thanks again for everyone's time you know we hugely appreciate it and we look forward to speaking to you again in three months’ time.