Webinar Q1 Market outlook webinar - Out with the old and in with the new

0:07

Good morning, everyone. Thanks for joining us today. I'm Anthony McDonald and I'm joined. You can't see him yet, but he'll turn up in due course, by Daniel Matthews and we lead the portfolio management team here at Ageon UK.

2025 was an eventful year for investing. We were reacquainted with President Trump and his disruptive policy agenda, and disruptive politics were also in fashion in Europe and certainly here in the UK, with the Labour government facing tough policy choices and U-turns as Reform has surged in the polls.

0:43

So, what's next? We're obviously a few weeks into the new year now, and we've already had another, mostly brief U.S. government shutdown, which you may or may not have noticed a couple of weeks ago, and the Japanese election from last Sunday.
So over the next 30 to 40 minutes, we're going to get to grips with the key developments, their impact and what we think they mean for investment risks and opportunities over the course of the year and beyond. That's all captured in the learning objectives that I've put on your screen here.

As always, we'll have plenty of time at the end for questions, so please do use the Q&A button on your Teams screen to ask anything that you'd be interested in knowing about our views on. We'll take any and all questions that that come through at the end of the presentation, and importantly during the Q&A session we'll share the CPD certificate link in the comments section, so please do look out for that as we get towards the end of this session.

01:46

This just confirms that we're going to go through the economic background, market performance and then a section on the outlook as we look into 2026, and what that means for our own asset class views.

Now, as the regular attendees amongst you will know, I always like to start with a quick reminder of our approach to investing your client’s money. It frames the way we analyse and explain our views on markets and events. I think it's always helpful to put it upfront to help you understand the prism that we deliberately look through. And that approach is rooted in a long-term valuation-based philosophy. We do try to look forwards over the medium term, tune out some of the short-term noise and direct your client's money towards those asset classes that we think are better priced and positioned for long term returns. We think that the starting valuation is a key driver of that.

02:58

We have a strong held view here. It says at the top, that markets aren't efficient, and effectively we mean that they can get cheap or expensive compared to any approximation of their underlying value. That can happen for all kinds of reasons, we all know about the cycles of greed and fear that we read and experience again and again in markets. But also, there are just lots of different actors in markets with different time horizons and different objectives. They may be hedging a physical exposure to a commodity, or they may be a short-term hedge fund trying to sneak out gains without losses.

Everyone's trying to do things in different ways and on a day-to-day basis that creates a lot of noise and pushes prices around. We think that we can genuinely add value for investors and our funds if we step back from that day-to-day noise, take more of a medium-term view of valuations versus the kind of macro environment that we're sitting in and position in those assets that seem better group positions to reward a longer-term investment. That's what we do

04:03

Starting with the economic background, what has been going on? Well, I put in at the top of this slide, the concept of fragile resilience. Different economies in the world are on different sides of the fragile versus resilient side of that but I do think it's a good way to summarise the economic background that we find ourselves in.

If I focus first on the positive side of the ledger, even though we've had that uncertain backdrop over 2025, at least in the first half of the year with tariffs, geopolitics, ongoing rumblings in Russia and Ukraine, the longest US government shutdown in history in October into November. And yet, the US economy finished the year with very strong growth in the fourth quarter of the year. It annualized a 4.4% growth rate, which is one of the best quarters since the pandemic, and followed hot on the heels of a pretty healthy Q3 figure as well.

05:20

I do think the second half of the year, those numbers were flattered a little bit by the tariff inventory cycle around President Trump's policies. But we still had a full year expansion of over 2.5%. Another healthy year's growth for the US economy, which appears to be in quite good shape. You can see that on this chart from a growth perspective. This chart shows the consensus economist growth expectations for 2026 and how they evolved over the course of last year, and as the economic momentum picks up in the second half of the year. You can see that purple line picking up as well as economists marked up their expectations for the growth rate this year based on that greater momentum that was entering the year. And that's probably reasonable. You can see that picking back up towards 2.5% expectations again for 2026, indicating that the economic background remains resilient and maybe more solid.

06:26

The Green Line, the UK, is clearly a slightly different story; a much flatter trajectory that may be tailing off a bit at the end, although the key is the difference between the two. Still, expectations for this year are at or around 1% economic growth. It's less exciting than the numbers we see out of the US, China or India, but it is positive and a long way from a recession.

The overall economic growth rate remains resilient. We've had a couple of years of over 1% growth. Looking at 2026, expectations here are for similar, so perhaps more solid than some of the doom and gloom than politics would lead us to believe.

07:15

However, not everything is completely rosy and particularly I highlight labour markets, and I've captured that here with unemployment rates. Unemployment rates in the US and the UK have been rising for the last couple of years. The green line, the UK more so, up over 5% unemployment now and that is a more challenging economic backdrop. There are a lot of economist rules of thumb; The Sahm Rule currently the most fashionable, suggesting that when you get to a tipping point in the unemployment rate, then the whole economy can roll over and struggle because you're not effectively growing individual incomes enough to maintain underlying economic growth.

08:13

As the previous chart showed you, we don't seem to be there yet, but that does explain why despite a reasonable growth backdrop, Central Banks across the world, but notably in the US and UK continued to cut interest rates in 2025, and at least in the UK we think will cut them further this year.

There are policy challenges in a world, where inflation is still a little bit above target. Growth is resilient and yet the unemployment rate and labour market are highlighting pockets of challenge within the economy. That's why the Bank of England we think, has been going slowly and carefully with interest rates, and will probably continue to do so. We do think that some of the challenges in the labour market point to economies that are not necessarily operating at full throttle.

09:10

That's where the K shape concept comes from. We'll all be reading a little bit more about the K shaped consumer environment in the US, and that's what I’ve tried to capture here. The mid to upper end of the consumer appears to be faring quite well in the US, probably will fare better and even better in early this year as they get tax refunds, but the lower income consumer is a little bit more squeezed by prices, the jobs market and is finding it a little bit harder to thrive. I think we'll hear more about that over the course of this year, not least because we've got the midterm elections coming up in Q4 and that will be a key political background.

10:03

So that's the economic backdrop. What does that mean for performance? Q4 seems a long way away now. But if I look back quickly at the fourth quarter, that combination of economic momentum and rate cuts really did help equity markets finish a strong year well. You can see, over towards the left-hand side of those bars, positive returns from most equity markets, and it was a third successive year of double digit returns from global equities, which are now annualising over 13% over the past 10 years, despite the COVID interruption. A continuation of a very good run for global equities.

10:41

Most notable, was probably the change in leadership within equity markets amid the global fiscal changes. U.S. equities, around 10% in sterling terms, did fine for the year as a whole, but they didn't keep up with the other main regions. The UK, perhaps surprising given the political backdrop, emerging markets, Europe, ex UK all delivered mid 20s in terms of returns. So, really healthy year for being invested in those asset classes and the US returns were fine but a long way behind.

11:17

You can see in the bars in the middle, gilts also enjoyed a good quarter. The government cobbled together a budget that avoided further political crisis for now. Clearly, we're in the teeth of the next iteration of that. But again, the worst-case scenario for Starmer at least, seems to have been postponed and indeed, that late rally from gilts last year meant that they outperformed overseas government bond entities over the year as a whole. It was a decent year for UK equities and government bonds in the end, just a bit bouncy through various stages of political uncertainty.

11:59

Now what we always do in this first webinar each year, is set out the themes that we think will prove most relevant to the year and talk about how we're considering them in our process and positioning. I always like to start doing that by reviewing the previous year's themes. It always seems a good exercise to think about what we said last year, before we tell you what we're saying this year.

What we said last year was a mixture of more controversial and more consensus ideas. We're not controversial for the sake of it, but there are times that we have strong views and like to share them. One of them this time last year, was that interest rates would fall further across most of the G7 economies.

12:51

At the time the US, very similar to now, was entering the year with strong economic momentum and some concerns about Trump's policy mix on inflation. There were questions about how many straight cuts, if at all, would be delivered in 2025. At the time we felt that the jobs market was softening, policy uncertainty was a difficult place to be and that from a starting point of restrictive policy, particularly in the UK, interest rates should continue to fall and that's what we saw in the end. That was one of the more controversial themes we set out for you last year, and that's how it played through.

13:44

We also saw ongoing, at times piece meal, measures from China to support its economy. It's still going through the aftershock of the big property crisis that it's been working through for a few years. And key amongst that, is that the people's Bank of China, the central banks are progressively reducing interest rates now to very low levels versus history. Some of the rates with a shorter history are at lowest levels ever; rates of around 3%. So, continuing to try to support the economy with both fiscal and monetary policy.

Here in the UK, we were very clear that we thought there were opportunities and challenges as well, but from an investment point of view, opportunities because the challenges were well understood and overly priced into markets. The key amongst that was that gilt yields were very high, versus their global peers, in some ways they still are. But gilts as we've just seen did deliver positive returns over the year and outperformed overseas government bonds. We saw the same in equities, where the UK equity market saw around 24ish% returns, well ahead of global equities and the US. So, for all the challenging headlines and undeniable issues that the government and the economy faces on a medium-term view, that idea of UK opportunities did play through quite nicely last year.

15:17

The last one of course, we put was Trump policy. There was nothing controversial about suggesting that Trump's unorthodox policy approach would be dominant for 2025, and so it proved to be. As we look into 2026, I refer to the two quotes at the bottom from 2025. We were looking at a change in policy direction globally, spearheaded by Trump but not restricted to the US, and that there was a potential jeopardy for markets priced for the previous regime. We had a very long period, pre COVID of ultra-low interest rates and successful growth-related US equity markets that had got to very expensive levels. Our argument was at that moment of policy change would also be accompanied by greater risks for those markets that were priced for the old regime, rather than the new regime.

16:21

I think that rotation, within equity markets started to come through last year. We still think it's very much the backdrop that frames the year. 2026 is not an all-change year like last year, but more a continuation of some of the things we've spoken about before. With that in mind, I'll hand over to Dan, who's going to talk a little bit more about what we're thinking into 2026.

17:04
This slide is titled Themes for 2026. On here there's four themes, I'm going to go into each of them in turn, but just to reiterate the point that Anthony made, which is last year was all about change and this year we expect some things to continue.

We've highlighted four 2026 themes, but we could have taken those themes from 2025 and pulled them into 2026. Interest rates will likely continue to fall, not everywhere, we'll come on to policy divergence later. China will likely continue to provide that policy support. The UK will probably provide some opportunities, albeit with marginally more volatility as the politics comes into play, and Trump has not gone away and he will no doubt rear his head this year as well, and we'll cover that under the geopolitical instability point.

17:57

The four things I'm going to talk about for this year are US inflation remaining sticky, that policy divergent, so things changing across the world, the ever-present AI and unfortunately the also ever-present geopolitical instability.

Our first theme for this year is sticky US inflation. I guess I should start by saying what do we mean when we say sticky. We're not forecasting a return to that big inflation spike we saw after COVID, we're not talking about another massive cost of living crisis. We're just talking about the difficulty in kind of getting the so-called last mile done. So, returning inflation to its target and maintaining inflation at that target.

18:45

If we start by looking at the chart on the left, this is US inflation, you'll note there's a rather curious gap there. Anthony mentioned it. That was the US government shutdown during which no data was published, so there were no data points for that time. What you can see is inflation does appear to have dipped down a bit recently, but that 2% threshold is the target and we are not yet at that 2%.

So why do we think that sticky inflation is likely to be a theme. First is that, whilst we've seen the US inflation come down, the US is a service economy. We all know services are labour intensive and so in order to see a meaningful reduction in inflation permanently, you need to see US wage inflation abate.

Whilst there is a bit of argument that AI productivity might drive this eventually, which we'll cover shortly, we're quite a long way away from automating the care that you get from nurses and medical staff or automating a haircut. There's lots of cases where AI productivity is certainly questionable.

19:44

There's also a number of themes at the macro level that have the potential to provide stimulus for the US economy that we think is likely to be inflationary. We all know about tariffs, but if we just set tariffs to one side, there's a wider deglobalisation trend. We're moving goods from the cheapest locations to produce them, typically China, and bringing them either to marginally more expensive locations but possibly still within Asia or going all the way and bringing them back onshore in the US, and this is likely to have the potential to push up prices. We also know that into this backdrop, the US appears to want to do both fiscal and monetary stimulus.

If we turn to the chart on the right. This shows the change in deficit in green for every year and the change in interest rates in pink. At first it doesn't look like much of a pattern; the bars are everywhere. But I'd invite you to look at the periods where they both move in the same direction, so when they're both below the line. That's periods where the deficit is expanding at the same time as interest rates are accommodative. This occurs in 2019 and 2020, ahead of the large inflation spike and again in 2024 ahead of inflation bouncing off that recent low we see on the chart on the left there.

The final two bars are the future, forecasts. Again, we see the deficit expanding at the same time as the market anticipates there to be interest rate cuts. Both of those things provide stimulus for the economy in the short to medium term, without necessarily increasing the economy's capacity. This tends to be inflationary, and we think this risk is somewhat underpriced. Again, we’re not forecasting a huge inflationary spike, but just that challenge of getting back to that 2% remains.

21:30

This next slide is somewhat related. This is about policy divergence. This is the idea that central banks globally will have to react differently to each other in response to the fact they've got different strains within their economies, different politics going on.

A couple of years ago, inflation was a huge problem. It was pretty easy for all the Western central banks to act together because they all faced the same problem. The solution, of course, was to raise interest rates and try and stop the inflationary wave, the cost-of-living crisis. That is now passed and these economies now face potentially different outcomes. We've had elections, we've had different policy, we're in a slightly different world. That means that their central banks will have to react differently to their individual circumstances.

If we start with the UK, inflation remains above target, but there are signs of some softening in the labour market. We saw the growth numbers that Anthony put up earlier on the screen. Growth has been positive, but relatively weak. And whilst personally, and I'm sure everyone else on the call, hasn't particularly enjoyed the process of endless budget speculation – tax changes that may or may not happen and pressure from bond markets and endless talk of the OBR. What this has meant is that the UK government has continued to consolidate their fiscal plans, and at the very least they do have a plan to control the deficit. Whether that plan meets reality shall be seen, but what that does mean is the UK still has a chance to avoid some of the pressure that it's more expansionary peers are facing. We think this means that there is the potential for lower interest rates in the UK, provided of course that the Labour government continues to hold this policy line

23:06

in Japan it’s a different story. We've just this past weekend seen a landslide with the Liberal Democratic Party getting their best results in recent history. This gives them a mandate to spend more and they're doing that against the backdrop of Japan facing its first real inflation for a very long time. So, whilst we expect potential rate cuts in the UK, most market participants expect between at least two hikes this year in Japan, with the potential for more depending on what that government does and how that fiscal stimulus plays out.

Turn to the US, we've looked at this on the previous slide. The market anticipates further rate cuts in part because Jerome Powell is gone as Fed chair. However, as we discussed the potential for that inflation to be stickier could make those future rate cuts marginally less likely than many people are expecting.

And then finally in Europe, we've seen some weaker inflation prints in some European economies. We also have this wave of German spending coming potentially in the next two years. A large part of this spending is defence. Historically, defence has not been great economic multiplier in Europe and the level of stimulus you get from defence spending depends very much on how you spend it. If you hire a large number of troops, then that's a lot of stimulus for your economy. If you go to America and buy a huge number of drones, then significantly less so. Either way, if you're sat on the European Central Bank, you're likely to not want to overreact to soft patches because there's this potential for stimulus coming over the next 24 months and so that changes the reaction function within Europe.

24:40

Overall, we think this provides good opportunities for bond market participants, and in particular, you will see when it comes to the convictions, the expectations for cuts in the US in greater magnitude than those in the UK feels to us largely unlikely.

That brings me on to topic number 3, which I think is one of the most interesting topics in the markets today. It's also one of the most over discussed. I'm sure you can find 20 different webinars where people will pontificate about AI.

There is a tendency amongst people that do the job that we do, to jump between trends and pretend that we’re experts in all of them. In 2020, financial people were popping up all over the place becoming experts in airborne disease. And then the Ukraine war started, and everyone became experts in military strategy. In the road to the midterms, we're all going to become experts in political polling again, you get the idea. Everyone thinks that investors want to hear from a so-called expert, even if that expert is kind of exaggerating or borderline pretending about their level of expertise.

Let me start this section by saying that we are not experts in AI. I'm sure Anthony will tell you that I’m a bit of a nerd, and AI is the sort of thing that I'm very much into, but I'm not out there building large language models. I don't work for Google. I'm not at the cutting edge of this technology. I do have some friends who are, and I can guarantee you that they would not be willing to give you investment advice on where the AI trend is going.

26:13

So, with that in mind what can we do as experts in finance, rather than experts in complex deep learning systems, look at when we're faced with this kind of trend? We can step back and say, OK, what's happened before? We can look for areas of irrational exuberance, where are people being overly ambitious with this and we can position ourselves away from those, and be careful not to get caught up in any so-called bubbles. We can also approach with an open mind and make sure that we're not underexposed. Where is that productivity going to work out and how is that going to play through the system?

What do we think is going to happen with AI this year? We think we'll start to see greater differentiation between those who the market perceives as being the winners and those who the market perceives as being the losers. At the moment, there's been a trend towards the market rewarding just an AI exposure and glossing over the factors to what sort of exposure that is, and whether that exposure is profitable or indeed not profitable at all.

One of the things that we hear most in this AI era, is the ever immortal and dangerous line that, this time is different, because tech companies this time have earnings and are more profitable. There's always lots of reasons to look at why this time is different to last time. All of that's true.

27:30

What we're starting to see is people question whether the AI components of those businesses are profitable, and what the long-term plan is for that profitability. Where is that profitability coming from in the future? We think this focus continues at a pace this year. Attention moves away from not only how wonderful it is that we're going to spend all this money on data centres, but more towards, what's the plan Once the data centre exists and they're operational? How do you make money from that data centre once it is a real thing and we've finished putting the bricks on top of each other?

We also think there are some potential questions around the productivity boom and whether AI will increase productivity. We've seen bits of that in our own workplace. It's definitely helpful more the kind of market view that this productivity boom emerges from some sort of immaculate, wonderful path where it doesn't require a greater shift of resources across the economy. In practice, when an economy restructures itself, that often comes in the form of job losses and ultimately some economic pain in different parts of the system.

Turning to the chart, this is looking at the growth in IT spend, as a component of GDP. If you look on the left hand side you can see the .com boom starting with the release of the Mosaic browser for those who are a bit nerdy, and ending in the early 2000s. On the right we see the beginnings of it happening again with the AI spend is starting to reach similar levels. And as you can see from this chart, it's perfectly possible for that elevated spending to be in place for a period of time. The .com bubble lasted for a decent chunk of time, and it undoubtedly had real world impact. However, we think the market will become more focused during this period on whether this spending ultimately leads to profits or not.

29:25

Last theme for the year and I guess come as no surprise, is geopolitics. This is one of those themes that is self-explanatory. We all know there's a lot going on in the world, but I think this is one of the themes that people have lost sight of. We live in this maelstrom of noise – social media and traditional media battering us from every different direction. It's easy to get used to our current circumstances and not take the opportunity to step back and notice how much things are changing around us.

This concept of slow change goes by lots of different names. In politics they call it the Overton Window moving, creeping normality, incremental drift. Whatever you want to call it, we think that this is happening to markets, where there is this underlying shift that’s happening slowly, so people haven't noticed.

In the UK, we often joke or make light of what is happening in the US with Trump, because it's our way of coping and understanding it. But in practice, what's happening would have been unthinkable under previous presidents. The boldness of Trump capturing Maduro from Venezuela, the movement against immigration, what's happening with ICE, outright threatening Denmark over Greenland. And that's before you get to financial things – the potential insider trading, the existence of Trump having a meme coin. The idea that they're going to have accounts for children, but they'll be called Trump accounts, they're not just normal bank accounts they have to have his name in. The day-to-day existence of tariffs and the fact that they fluctuate based on the whims of one man. You don't have to step back very far before you think, hang on a minute, this has gotten rather heated versus the past.

31:09

This year, as Anthony said, we also face the midterms, which we would hope afterwards will create some stability. The likely political outcomes mean that Trump's future power will be limited. However, those midterms are in November and there is a lot of year to happen between now and November, and the kind of stress of their approach is unlikely to dampen down the US political agenda in the interim.

It's also easy, of course, for us to look across the pond and scoff at the state of their politics. But closer to home, the UK has had six prime ministers in the last decade. Were Starmer to go after the May elections, it will be 7. For context, the preceding 6 prime ministers lasted for 36 years. That also works for chancellors, there was 8 preceding chancellors in the last decade, and coincidentally also eight in the preceding 36 years.

We also go into local elections with a Prime Minister who is arguably struggling to cling to power as it is, add to that the rise of Reform and we've got the makings of our own geopolitical instability in the UK.

We've also talked about Japan. They've just had that landside election but we haven't talked about France and the rise of the right there. I also haven't mentioned Russia or Ukraine. There is a lot going on here. To cut a long story short, we don't think this geopolitical instability is going away at times when markets are valued pretty much to perfection, both in equities and corporate bonds, and those markets are driven by things like AI, whilst interesting are also fragile narratives. This geopolitical instability has the ability to upend things very quickly.

It doesn't necessarily guide our direction, if you think back to our philosophy. This is a long-term fund; we're looking for long-term trends. We're not making micro decisions based on the swings of politics, but it does set the risk backdrop.

32:56

This is a graph of geopolitical risk index, which is a news-based measure of geopolitical tension. I'm sure we've all seen Google Trends where we count the time people Google search certain things. This is a good old school paper version of this, which looks at how much major newspapers are talking about wars, terrorism, international crises, that kind of thing. What we see is big spikes around 9/11, big spike around the subsequent Iraq war, big spike around COVID. But most recently, there's this uptick and permanent raised level in the line. We think speaks to what I was talking about earlier, that shifting Overton Window, which is that the level of geopolitical risk is becoming background noise. We see this as a kind of complacency within the market and it's definitely a theme that we will closely follow going through 2026.

This is what the actual portfolio is looking like at the moment and I hope that this makes very clear, given the things that I've just discussed. The fund is underweight in the US due to the significance of that overvaluation we see in the equity market, combined with that geopolitical fragility. We're underweight investment credit, investment grade credit again spreads as tight and we don't think it's compensating investors for the risks. We favour UK bonds over their overseas counterparts due to the potential for that US sticky inflation and that policy divergence theme, and we do continue to favour the UK, although that position is kind of heavily skewed towards mid-caps where we perceive there to be significantly more value than the larger caps.

34:43

Whilst I’ve spent time talking about 2026, I just want to reiterate that 2025 was a big year of important change and we think those changes continue to shape what happens next. As always, our funds remain true to that valuation process and everything we do is looked at through that longer term valuation lens. There's a lot of noise going on around us at the moment, and we're trying to prevent our portfolios being buffeted by that noise, rather than embracing it and letting it push us every which direction.

With that, we're balancing our allocation, but progressively reducing our exposure to more expensive assets. We remain underweight in those US equities. We've got some defensive strategies, so we're favouring government bonds and cash over credit to mitigate some of the downside risks.
And with that, thank you for listening, and Anthony and I will gladly take any questions that you might have.

35:48
Thanks, Dan. Please do keep bringing through questions. It's good to have some here already. Anything that you want us to talk to, we're happy to talk to. First one here, Dan, I suppose given that you called yourself a nerd in this respect, I think this AI question probably goes to you.

How are you using AI within your own process?

36:12

It's a good question. The answer is we are, but we're using it for non-investment things. AI is prone to hallucinations still and a long way off providing any sort of investment advice and I don't envision that being a part of our process anytime in the near future, this is not that kind of fund. I'm sure those funds will spring into existence, but this is not a fund where we'll be replacing analysts with AI and asking AI’s opinion on various financial markets.

That said, we do build a lot of quantitative models, and we look at some things through a quantitative lens and it's very helpful when it comes to anything that is programming.

One thing that doesn't relate to AI, but relates to everything we do, is that any part of our process, no matter what it is, always hits a person at the end. There is no situation where anyone on this team will be vibe coding things and producing things with AI that they don't understand. Long before AI existed, we have always made sure that everything that happens, any sort of information that we produce passes through a human being for a sense check and interpretation. And that's the core of the philosophy, right, which is we have these valuations, those valuations are largely numerical and then those valuations go through a human filter where we include the macro, what's going on in the world, and that kind of thing. That's deeply embedded in our process.

Can the AI ultimately help with the more quantitative side of things? Yes. Does that ultimately then feed into that very important human filter and overlay, that I don't envisage changing. Also, yes. But I do think others will potentially embrace it and do AI only type strategies.

I never say never because they may well reach full sentience and I may be mistaken, but it doesn't feel like that's going to change for us. We're using it a lot for traditional business processes, and then the money is managed by us and will remain managed by us.

38:24

Thanks Dan. This second one I'll put through to you as well if that's OK.

Starmer is toast. What does that mean for guilts?

38:40

I think it's an interesting one. I think the reality is it does increase the risk of guilt yields rising.

One of the things people don't talk about enough in this case, is the opportunity set that provides. The fundamentals around the UK economy are unlikely to be materially shifted. The reasons that Starmer is toast, is that Starmer has not had an enormous impact in the state of things in the UK. His going is likely to have a similar lack of impact on the core things such as inflation getting back under control, what the Bank of England does, those kind of things. Does it change the political premium on gilts? Yes. Do we see more volatility in gilts? Absolutely. Does that volatility potentially provide opportunities to be able to get something that, the fundamental trend is valuable, for a reduced price because there's a bit of a scare in the politics around it, I think potentially, yes.

It's a risk we are definitely cognisant of. We've reshuffled the way the gilts are in the portfolio. We've switched around the durations. So, the position itself doesn't necessarily move, but by adjusting the mix there, we can flex the portfolio from a duration standpoint. We've done a little bit of that. But broadly speaking, I look at it as an opportunity as well as a risk very much so.

40:09

I'd add very quickly, in a world where many assets look quite expensive, and for us that translates to lower medium term expected returns, yields of 4.5 towards longer, and over 5% on gilts in themselves. It's a good to wait for you yield interest rates to come down over the medium term which we think they will. So, kind of within a portfolio that yield looks attractive compared to what we can see elsewhere.

40:52

I'm going to jump in and ask you one of them now.

Given the result of the weekend in Japan, have we had any changes, or do we plan any changes to our positioning there?

41:04

Really good question. Nothing significant at this stage would be the quick answer. I'll explain why.

In the run up to the election, we did very slightly trim the Japan waiting. It's still our largest overweight in the portfolios, but since Sano Takichi has become Prime Minister in the second-half of last year, the Japanese equities have really run very well. They don't look as cheap on our valuation measures as they have done in recent years. And so, we did step back and say there is a time of political change which ultimately can work through in different ways. There is a broader range of possible outcomes there, and the market has got more expensive, which means it's focused more on the positive outcomes. So, you'd expect us to be thinking about that and to starting to gradually lighten up the position.

We did take a little bit off the position, but not a huge amount because that market still doesn't look as expensive as some of the other markets, led by the US. We still think on a relative basis, the valuation is pretty attractive in Japan. If anything, we think that a more supportive political environment can help unlock that valuation if you will, because for almost 15 years now, been in the backdrop of political change, which we do think has led to real change in the long term shareholder return potential from Japanese equities.

We've seen that coming through in dividend yields. We've seen that coming through in earnings over that period. But what we think of as a structural improvement in earnings hasn't been rewarded to the same way that similar earnings growth has been rewarded in the US. We do think there is a case for those earnings to be rated better by the market, and if it takes a well-received political change to do that, then this election could unlock the Japanese value case that we see, rather than being the end to it.

We do think that broader range of policy outcomes and some uncertainty around what it means to the Bank of Japan and interest rates, could unlock rather than derail the investment case. And so, we still keep that decent overweight to Japanese equities in the portfolio.

43:45

That's all the questions, so thank you everyone for joining us. Thank you very much for sending through your questions. It's good to have the engagement. We appreciate your time today.

The CPD link has been posted, so please do make sure you download it and if you'd like any more information on our market views or investment solutions, please visit our website. All the best. Hope you have a good afternoon, and we'll see you again next quarter.

44:14

Thank you.