← Merryn Talks Money
Merryn Talks Money
Markets Weekly: AI Sparks Market Rotation, UK Political Risk, and the Pensions Property Debate
00:18:08
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- [00:01]
A
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- [02:15]
A
Welcome to the Marant Talks Money Market Wrap where we talk about the biggest moves in the markets this week and what's driving them. I'm Maren Sums Up Webb, Editor at large for Bloomberg UK wealth and I'm.
- [02:24]
B
Joined Stepk, senior reporter at Bloomberg and author of the Money Distilled newsletter.
- [02:29]
A
Right. John Sometimes we look at each other and we go, well, what is the most important thing happening this week? What is the big move around? You know, the last couple of weeks, months has been bitcoin, gold, silver, blah, blah. But this week it's pretty obvious what's going on, right? The rotation that we've been expecting for ages that we've been talking about on the podcast, on this bit of the podcast with endless guests, it's finally upon us. And I know you've written about that this week, so I'm just going to hand this all over to you. Tell us about the rotation.
- [02:56]
B
Ah, the rotation, of course. No, this is really actually pretty interesting because what's happened is that companies that are going to be potentially disrupted by AI have been sort of struggling for about a year now, but nothing major, just drifting lower. And then last week one of the big AI companies anthropic released like an illegal tool and then this week another one released like an insurance comparison tool and there was a financial services one as well. And so basically suddenly all of these big stocks that are in these areas have been whacked for about 10 to 15% in some cases. And almost anything that has any kind of platform or kind of digital exposure that could potentially get disrupted by AI is seen. What I would say, to be honest at this point is kind of an indiscriminate sell off. I mean we're looking at, you know, the London Stock Exchange group Relics, the kind of which owns LexisNex. It's a big legal database, but things also like Auto trader and rightmove Money Supermarket, the comparison site, anything like that is all being sold off quite heavily. And of course the flip side is that anything, I guess, I mean it's very tech boom, isn't it? Because anything old economy is going up so you know, kind of miners commodities. One of the biggest gainers this year has been weird group in the footsie that's an engineer and a mining kind of services manufacturer. So yeah, so basically it's all been.
- [04:34]
A
So basically if I were to sum this up, yes, in the past the market was going up a lot because AI might work and now lots of stuff is going down because it's going to work.
- [04:47]
B
Yes, I think that's true, I think that's true because I think a lot of these companies were assumed, it was assumed in some way AI they would exploit AI. And now people are starting to wake up to the fact that well actually maybe they get destroyed by AI and the answer is probably somewhere in the middle.
- [05:04]
A
So we are effectively the market is thinking we're leapfrogging a whole stage here because initially the idea was well isn't this great? It's going to increase everyone's productivity and all the legal firms and all this kind of thing, we'll get a massive productivity boost from it. And that's Marvelous. Now there is no productivity boost for these firms. There's just other companies doing what they do much better using AI. I mean I was interested in the wealth managers one today. You know, wealth managers had quite a sell off on, on the basis of this as well. On the basis that, you know, you don't need a person anymore to run through your bank accounts and your tax returns and make you a better tax strategy. Although then I thought to myself, oh my God. Well this is, this is, this is the thing will finally drive governments to say, well that's it, no more AI, no more of this research, no more explosion. We are done here. If this is going to suddenly teach you all how to do your taxes better, we don't want to hear any more about it. But that's another podcast.
- [05:59]
B
Yeah, and also you may get state sponsored AI that gives you sort of the sort of acceptable tax planning as opposed to proper tax planning which is to minimize your liability.
- [06:15]
A
All this may also be the removal of, of tax evasion. Of course, that's the other thing. If you can use some type of AI to run through everybody's expenditure and income and how many vaping shops everyone owns and that kind of thing, you may get out the other, other end of it with higher tax revenues. I don't know, just thinking aloud here anyway, I kind of feel they can.
- [06:40]
B
Already do a lot of these things. But yes, maybe it will make HMRC productivity go up.
- [06:45]
A
Well, you could do it with fewer people and also possibly if someone could to the phone at hmrc, that would be a massive bonus too. Now listen, this rotation is not just about sectors, it's also about countries. So we're seeing for example, Asian markets have had one of their best starts to the year in over well over 20 years. 20, 25 years. Europe of course still doing well, UK. All right, but you would think that the shift from soft stuff to hard stuff would be certainly FTSE 100 positive. Although we should also say that only today we've lost yet another member of the FTSE 100 Schroeders being bought up by an American company and taken off market. Although we gather as a, they will still get to be the London headquarters for their new owners.
- [07:29]
B
So that's nice, that's interesting because the timing of these deals is sort of typical, weirdly enough as well, because NatWest bought Evelyn, which is a privately owned kind of tax wealth manager type company. And it's interesting that they're doing this just as these business models are potentially coming under threat from AI.
- [07:51]
A
It's Interesting, isn't it? We had Evelyn going at the very high price a matter of hours, matter of hours before wealth management share prices fell dramatically on the basis that we don't need them anymore.
- [08:02]
B
Yeah, and I think, I mean maybe that's just your standard top of the market stuff, but I think that was actually quite unexpected. I mean the other thing about this, and I don't know this is slightly changing this subject, but is how much of this is hype and how much of it is real and I'm completely torn about this.
- [08:26]
A
Well, I think you're a non believer, John. This is like even Bitcoin, you just can't get over the line with technology, can you?
- [08:32]
B
Well, at the end I'm very aware of my own limitations from that point of view, otherwise I probably would be more skeptical than I am. But no, I mean to be fair, I talk to software guys sometimes and they do make the point. No, this has been changing our business for a long time now, like probably at least 18 months. So it does seem clear that there's quite a big potential thing going to happen. Equally, it's also true that the AI companies have got a lot of incentive to keep the hype cycle going as aggressively.
- [09:08]
A
Oh my goodness, yes. I mean they're spending 2% in the US, that small handful of companies, they're spending 2% of American GDP on CapEx this year.
- [09:16]
B
Exactly, exactly. So all of these bits on social media and all the rest of it talk about how the end of the world's about to come or your job's going to get swept away and you need to prepare now. And also you need to subscribe to your nearest ChatGPT or Claude or whatever is.
- [09:34]
A
Everyone else is using it. I hear everyone else is using it.
- [09:37]
B
Exactly.
- [09:38]
A
It's not like the adoption of cars or the Internet. It's very, very sudden.
- [09:42]
B
Maybe it is, yeah. I mean, but certainly it's interesting. It's definitely the market appears to have just had a proper moment this week where it's going actually, oh my God, this is real. We need to start thinking about where we're going to put our money.
- [09:56]
A
But interestingly, with the fact that this is a rotation, not a crash, you have The S&P 500 pretty much flat.
- [10:05]
B
Yeah, I mean that's the other kind of nice thing about it. Or the nice thing about it is that if you are kind of slightly lazy, kind of passive or index investor, then it's not actually having that much effect on you because, well, you might.
- [10:20]
A
Not have noticed the index Investors got away with it again.
- [10:23]
B
Yeah, exactly. I mean, the one thing I do think is that because the US has more of these stocks, it does make the argument for moving more money out of the us. Again, from that point of view, maybe the index investor does have to pay a bit more attention, but it's not a crash as such, it's a sector slump.
- [10:47]
A
Well, I think that's what I was about to come to, this matter of the rotation. And actually we've got a very good podcast coming up about Asian markets and with particular reference to Southeast Asian markets, which is really interesting. And I will write a little bit about that for subscribers only, just to be clear in my newsletter this week. And also I was going to write a little bit about whether it really is time to allocate a little bit of money to Africa markets. Quite a few ETFs that cover Africa as a whole. I know that it's a very big place and there's a lot going on, but there is an argument made in Joe Stadwell's new book that Africa as a whole has finally reached the level of population density that Asia hit when its miracle growth began. Quite interesting. Not a way that I've looked at things before. I think about demography a lot, but I hadn't looked at the population density comparison between Asia and Africa and how that makes a big difference. I'm right about that this week, too.
- [11:47]
B
Oh, that's good.
- [11:48]
A
Get around to it, which I probably will. But the place that I wanted to talk about was the uk. You and I have for a long time been so positive on, not the UK in every way, but certainly on UK stock markets. And what we have said over and over again is, yeah, there's a lot of political chaos in the uk. There's a lot going on. GDP growth is appalling. GDP per head is a mess. The culture wars are all over the shop, the housing market is a mess, fiscal position is a mess. But yes, UK equities are cheap and there are some great companies in there. And you mustn't confuse the macro world and the corporate world and you mustn't confuse GDP growth with valuations, all different things. Therefore, it's perfectly reasonable to buy into the uk. Now, my worry, my worry is I'm going to put smaller companies aside for now because they're still phenomenally cheap, but up at the higher end. The UK's had a good year last year, good start to this year. 5100 is not insanely expensive, not even expensive in relative terms it's still very cheap in relative terms. But is it cheap enough now, cheap enough to discount the level of idiocy and chaos among the ruling classes?
- [13:16]
B
I mean, I think that's a really good question and I think it's a tricky one. I'd probably feel reasonably confident about the FTSE 100 still being okay, because an awful lot, you know, there's only so much that the UK government can do to damage those companies because so much of the money comes from overseas. And also, and there is, you know, with a great rotation going on, if that continues, an awful lot of the stocks in the FTSE 100 are prime candidates for benefit. And from that, you know, because there's resources, there's oil companies, there's drug manufacturers that.
- [13:56]
A
Sure, sure, sure, sure. But what about flows? Here I am, I'm sitting in the us, I'm a massive institutional fund manager. I'm looking around the world and I'm going, oh, yeah, Japan, that's going in the right direction. Now, some of those Asian economies, they're looking pretty, pretty tippity top. Europe, I don't know. But at least they haven' prime ministers in the last 10 minutes. And at least they're not about to do what it looks like we're about to do in the uk, which is take another great stumble over to the left at a point when. And we've talked about this before, you and I, about the social attitude surveys, right, And I'm always looking at the social attitude survey, very interested in that. And there's one in Scotland and one in. In England, and you can see the differences of opinion between the two regions and all that fascinating stuff. Everyone should go and read these things. And this year, you know, it's really hard to get the electorate in the uk, really hard to get them to say that they would like to see less tax and less spending. That just doesn't happen. That's not the kind of people we are. No British values, we're kind people. Right. And so normally, if you ask people that question, do you want to see lower tax on spending? It is always under 10%. Always. Often. Historically, it's been knocking around 3, 4, 5%. That's just not what people think. It has never gone above 10% until the last three years and now it's nearly 20.
- [15:14]
B
Wow, that is a big.
- [15:16]
A
There comes a point when you've got this division you have between the electorate and the people they elected is getting weirdly wide.
- [15:27]
B
I don't think Keir Starmore can survive because I think that his authority is non existent and eventually somebody will get kind of shot of them. Does the party then swing left? I mean, probably so. No, I mean that is a big risk. And you're right in relative terms, I think Japan suddenly does look very politically attractive compared to if you are a US manager looking to go elsewhere at the same time. Again, the one and only thing I would say is that the nature of the companies in the FTSE 100, specifically the fact that the UK is still one of the biggest markets in the world in terms of msci. Yeah, I think we are too big to ignore from a flows point of view if you're going to get out.
- [16:20]
A
And I think you're probably right to a degree which is that as money moves out of the us, it might not be. The analysis might not be market specific, it might just be a rebalancing across the board. And then we should also say of course that UK smaller mid cap companies are still ridiculously, remarkably, extraordinarily cheap. Although perhaps we're getting close to the bit where we might have to file that under cheap for a reason. Oh, feeling a little defeatist today.
- [16:46]
B
Oh no.
- [16:48]
A
All this time we've been bullish on the uk, tried so hard. Maybe this marks the bottom. Maybe we've got the end of the chaos and everything will be fine from here. Is there anything else we should say, John?
- [17:02]
B
The only other thing you should maybe talk about is pensions and property, but maybe we should save that for another one.
- [17:08]
A
I'm not, I didn't. Maybe you shouldn't have pressed that button. I just want to say very simple thing which. There's an article in one of the big newspapers this week about how it is time that people are allowed to withdraw money from their pension early to put down as a deposit on a house. And I would just like to say that if you take money from a pension early, it is not a pension, it is a savings account. And the whole point of a pension is that you do not access it for any reason at all, ever, until you hit pensionable age. And that is why, because we do not allow it. This is why the UK has pension assets, actual tangible assets as a percentage of gdp knocking around 80%. And why every other economy around the G7, OECD, EU, whatever, rarely goes above 10%. That makes our pension system safe and their pension system dangerous and we shouldn't mess it up. Can you just agree with me, John? Cause this is very important.
- [18:08]
B
I agree with you. I'm sure we may find a way to mess it up, great.
- [18:13]
A
But we will find a way to mess it up if we interrupt it up. And the one thing that the UK has, the one excellent set of policy choices made by otherwise idiotic politicians over the last couple of decades has been around the pension system. I mean there are mess ups around the DB system, around what they can and should invest, invest in how they should and can invest, and around, you know, the removal of the dividend tax credit under Gordon Brown and all that sort of thing. Not perfect, but nonetheless that solid group of assets inside the DB system and the solid group of assets inside our new DC system with self assessment. Self assessment. That's not what I meant. You know what I meant.
- [18:50]
B
Tax on the brain.
- [18:52]
A
Attacks on the brain. I know it's a good system and it's one that will continue to be able to pay out even after the government has gone bust. And you can't say that for European systems. If you let people aren't taking money out early, you ruin the whole thing. And anything you can withdraw money from before you hit pension will age is just to repeat, not a pension. That's all got that off my chest. Thanks for. Thanks for reminding me how irritated I was about that, John. Right. Thank you for that. We will leave it there before he gets me going on something else. Thanks for listening to this week's Marion Talks Money Debrief if you like us show rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter ariannas, W and JohnStepek. This episode was produced by Sama Sadi. Production support and sound designed by Aaron Casper. Questions and comments on this show and all our shows are always welcome. Obviously we're very interested in your comments on pensions, although we may not agree with them. Our show email is merriamoneylumberg.net.
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