David Kuo talks to Justin Urquhart Stewart about the outlook for 2013.
David Kuo chats with Justin Urquhart Stewart from Seven Investment Management about the outlook for 2013 in the last Money Talk podcast of the year. They look at America's fiscal fudge, Europe's debt debacle and the UK's decision to appoint Canada's Mark Carney as the next governor of the Bank of England. They also discuss what impact China's new leader, Xi Jinping, could have and lots more.
You can listen to or download the full podcast here.
David:
This is Money Talk, the weekly investing podcast from The Motley Fool. I am David Kuo, and the start of the new year would not be the same without my next guest, who can spread calm where there is agitation, impart tranquillity when there is volatility, and be rational when others are absurd. He is the voice of reason, the sage of finance, and an all-round decent chap. He is Justin Urquhart-Steward from Seven Investment Management, and he is with me now. So, welcome to Money Talk, Justin.
Justin:
David, I'm hugely flattered. That's completely untrue, of course, some of that!
David:
You know you are the voice of reason, and you do spread calm where there is agitation. Whenever the market falls, they always say: "Bring on Justin Urquhart-Stewart to explain why the stock market has actually fallen a couple of hundred points."
Justin:
Well, as ever, our media still loves to actually point out the worst aspect of everything. It was only the other week when we had, what was it, another drop of, I can't remember how many points, and it was x billion wiped off the FTSE 100. "Mr Urquhart-Stewart, what does that do to our pension schemes?", to which the answer is, of course, well that leaves us with 1,300 billion left – what's your point? It is ridiculous. It is about time actually that we spent more time educating this broader media to really understand actually the figures they're talking about.
David:
But is it the media we need to educate? Or is it just generally people here in the UK that we need to educate?
Justin:
Absolutely – we need to start right from scratch. I do try and go to schools – I obey your orders to try and do this, every couple of months, and it's fascinating, because they know what the problem is, because they hear their parents moaning about it the entire time; it's just they don't know what to do. We teach them economics – we don't teach them finance, and how they actually need to put things together. Once they get it, and they understand it, that's why The Motley Fool's so important, because then people actually would get interested in it. We can't necessarily make it entertaining, but we can make it interesting, and let people get more control of their lives, because this is a common theme at the moment: it's confidence, no-one's got any confidence. If you could actually inspire people to think, "We're not doomed. We had 10 years of boom, followed by 10 years of lean" – it's almost Biblical. Moses turns up quite soon. We're three years into it, you've got another seven years to go – get used to it. So understand the cycle, and get people used to the idea that actually we're not doomed – we're damaged, and damage can be repaired.
David:
Now, I'd like to pick up on that point – why do you think people still have this perception that the stock market is some kind of casino for the rich?
Justin:
Because that's how it's put over the entire time. It's that idea that you can have a punt on it. It's a sort of financial version of the 2.30 at Newmarket; whereas in fact, every single person in this country has some connection with the stock market, and therefore we should be enabled to understand it, whether it's in terms of only their pensions; even government expenditure, because obviously that reflects in terms of government debt, and that also has an impact on what's happened to the stock market. So it affects everybody, and yet there is absolutely zero education about that to the broader public.
David:
OK, so you're only spreading calm where there is agitation, because I'm actually sort of feeling quite calm now. Hopefully I'll continue to feel calm throughout this entire podcast. But if we can just go over to America, and start in America, and have a look at what's going on over there, because there seems to be an awful lot of agitation between the Republicans and the Democrats.
Justin:
Yes, the key issue at the moment is political, and do you trust the American politicians not to do something stupid? Don't answer that question! The key issue is, and of course we're all sick to death of the fiscal cliff and the debt and the deficit, but let's take a step back. The American economy's growing – not as fast as it should be, but it's growing. But the key driver of the US economy, Mr and Mrs Joe Schmo, living in Little Rock, Arkansaw, and shopping in Wal-Mart, they, of course, have been devastated by their houses, that house price crash. We haven't seen a house price crash in the United Kingdom, not on that sort of scale. In fact, where I live in west London, we haven't seen a crash at all, mainly because we've got Russians, and the combination of Russia and Standard & Chartered, we used to call it money-laundering – now we just call it investment, so house prices are going up there, but that's got nothing to do with it. In America, what you've seen is this terrible property price crash, and of course that destroys confidence. Now, for the past nine months, we've seen the Case-Shiller index starting to rise from low levels; we've seen the building index starting to improve, and the confidence levels beginning to improve. We had Black Friday – well, it was black. You never get Green Tuesday, or Pink Wednesday, do you? It's always black, Black Friday after Thanksgiving, and so the retail sales were up there. So it's beginning to show signs of improvement, but the whole thing could be halted, if they don't get agreement on the fiscal cliff, and actually get an agreement to organise themselves, and I believe they will come up with a fudge, because the Americans always do. They only have one answer to this, whether it was Obama or Romney – it's going to be capitalism. They will try and grow their way out of it. So I suspect what we're going to end up with is a huge fudge, whereby they'll come up with a phrase such as, "We've developed a glide path", which will enable them to say, "We're going to run the debt and deficit down over 30 years", which means you just park it in the corner for the moment, and then try and actually get a growth through the small and medium-sized companies and Joe Schmo, to get the economy moving again. Actually, a combination of Joe Schmo, property oil prices, those shale oil prices and shale gas, and also corporates are sitting on a huge amount of cash at the moment, puts them in the position where actually there could be a more reasonable recovery. So I'm a little bit more optimistic, if they can get a political agreement.
David:
But this time last year, we were talking about the debt ceiling. Now we're talking about the fiscal cliff. One of the big worries that people have is that this printing of money is going to cause a currency collapse in America. We've already seen the American dollar lose its value against many of the Asian currencies. What is the outlook for the dollar, as far as you're concerned?
Justin:
The dollar is going to continue to weaken, and frankly that's what they want to try and do. They want to try and actually make sure the dollar gets cheap at the moment, because actually they've got certain manufacturers even returning to America at the moment – not a huge amount of it, but some of it's certainly there. So yes, for the western currencies at the moment, it is that awful phrase of the race to the bottom.
David:
That is worrying, isn't it?
Justin:
It is, if you're just trying to devalue your currency to try and get out of it, and of course that's something Britain's done as a sort of past masterclass for several hundred years.
David:
They could take a few lessons from us, couldn't they? We are very good at devaluing our currency.
Justin:
That's our way of trying to get more efficient – make it cheaper!
David:
Now then, if we thought that America had problems, it has nothing compared to what Europe is facing right now. This time last year, we were talking about the European debt dilemma, and guess what? We're still talking about the European debt dilemma.
Justin:
It's interesting. The question, I think, all investors have to ask themselves, and we all have different views on this, unless you're on the whole a reader of the Daily Mail, of course, in which case the euro is a creature of Beelzebub; the question you have to ask is, "Is the euro actually going to survive?"
David:
You're thinking of Peter Hitchens there, aren't you?
Justin:
That's it – that'll be the one. So is the euro going to survive? And you have to understand, I think, that the euro, of course, is as much a political animal as it is an economic animal. It was in the Treaties of Rome, and now, when you actually look at it, where's most of that debt sitting? The answer is, with the ECB. Who owns the ECB? Well, 27% of it's owned by Germany, so Germany's already on the hook. So it's got nothing to do with German euro bonds and things like that; Germany is going to actually make sure this thing works, because actually it can't afford to get out of it now. Let's be clear as to what's happening within the eurozone, and unfortunately in Britain, it never gets a very good press over here. What you have had, of course, is Germany now being in a position where, remember – go back 18 years ago, I remember the headline: "Germany: sick man of Europe" – why? – because they had to buy East Germany, and go through that pain. When the eurozone started, and the euro started, it was an opportunity for all those countries to benefit from Deutschemark rates, to go from 8% to 2%, so either get themselves really efficient, or have a party, and of course, we know what they did. So as far as Germany's concerned now, Mrs Merkel's turning round and saying, "We do very well out of the eurozone. Just under half our exports go to the eurozone, but on the other hand, I'm glad you're buying all our cars, and all our bits of engineering, but I'm not sponsoring Stavros's pension scheme, so we need to have more discipline in there." But the trouble is, if you say, "I want discipline, process and structure" – now say that in a German accent, and most of Europe goes, "Oh no, not again!" So Mrs Merkel can't put in the disciplines she would actually want to have immediately – she's got to do it gently, which is why we have more summits than the Alps that we have to go through, but dots are being joined together. Now, I think there's a clue and actually is the way out of this – the mood music has changed, because not only did we actually get the ECB, and dear old Draghi actually then sort of saying that we're going to be in a position where, don't bet against the ECB at any cost. What's going to happen now, of course, is, Germany goes to an election. Mrs Merkel's got a relatively flat economy – her confidence is OK, but it's flat, so she's going to want to go with a growing economy. She's going to have to come up with her own stimulus package. That means the eurozone will start to have more of a stimulus package. The efficiencies in Spain, Portugal and Italy are already beginning to show through, and especially Ireland. Greece is a separate case, I'm afraid, it's a bit of a basket case, because the Greek economy's never going to recover, unless we suddenly go and have a taramasalata fest, or something like that, and I'm sick of olives. So actually, what you are seeing is progress being made there. If the mood music changes to start getting some growth back into it, then it'll change a lot of that attitude, and bring back that word again – confidence, because remember a lot of those European corporates are sitting on large lumps of cash, just like the American ones, and the same position – not willing to invest at the moment, because they don't have that confidence. So that could change, so it's all down to, yet again another political decision – this time it's Mrs Merkel. The person I worry about particularly actually, in the eurozone at the moment, is France, because Hollande has gone back on any of the progress that Sarkozy had made, particularly with regard to pensions and things like that, and it's quite obviously, Hollande and Merkel don't get on in the same way that she did with Sarkozy, and of course Mrs Merkel isn't like the old West German leaders, still apologising to the French – I'm terribly sorry; third time lucky – try not to do it again. She's a Pomeranian – not a dog, but she's East German, so a different attitude altogether.
David:
So what about Italy? What is the likelihood of Berlusconi coming back in Italy?
Justin:
He's not going to come back. The trouble is, his party couldn't make enough noise, and interrupt the changes. I hope that actually we find ourselves in a position where we find the Italian leadership continuing. I don't think Berlusconi will come back, he'd be absolutely bonkers to do so, but then again, he is.
David:
Now then, you were talking about joining up all the dots within Europe. Now, one of the big dots, almost like a pimple really in Europe, is the banking system. Now just recently, we heard that the ECB will be looking after 200 of the biggest banks in Europe. What does this mean for the banking system within Europe, and also the UK?
Justin:
If you're going to run a single currency, there are various things you must actually have to try and do. So you've got to have a single mechanism for actually regulating your banks; you've got to have a harmonised tax system; you've got to make sure the money flows from the point of where it's deposited to where it's lent, and then actually back to where it's deposited again. You need all of this, and you need the debt levels controlled, just as we have in the United Kingdom, at the moment. It would be an interesting issue actually, what happens. Supposing we give Alex Salmond in Edinburgh the chance to raise his own taxes – then he really could create the Edinburgh, make it "the Athens of the north", and you actually create a Greece within a single currency of sterling. That's a classic illustration of actually what's happened with Greece. So you need the disciplines in place, so you need that bank regulation, and does it affect it? Well, it'd be interesting to see what's been agreed with this. It looks as though we've had our suitable exemptions for it, but it's quite right that we should harmonise with that European bank regulation. That does not mean we necessarily have to have the same regulation of it, because we're not in the single currency.
David:
So you still think that London will be the financial centre?
Justin:
It depends how much of that regulation is going to actually go, but more to the point, the actual operation of what's going on, because the regulation has already started moving anyway, because of what we've seen in terms of some of the directives coming out. But in terms of operations, the City of London and Canary Wharf ain't going to disappear any time soon, because it's not just banking – it's all the other trading and derivatives, and it's all the other legal and accounting, and the language – all of those things are actually linked together. Now, you're not going to find that moving overnight, because that's already well embedded. It could move, if London decided to actually make itself tax-inefficient, but that's another issue, but I think it highly unlikely.
David:
OK, so as far as the UK is concerned, do you think that the coalition is actually doing the right thing in the UK, in order to get the UK growing?
Justin:
No! Oh sorry, do you want some more detail? Do you have to have austerity? The answer is, yes, you do – of course you have to have austerity; why? Because we need people to buy our debt. They're buying our debt; after all, gilts are regarded as a safe haven. We have never paid so little for our gilts, ever since William III first invented them, to pay for the war against the French. But in fact, what you've got here then is, of course, a very well-managed debt. I think there's an issue here: Britain doesn't have a debt crisis. It's got a lot of debt – it's not a crisis. America's debt on average is five years, Germany is about five and a half, Greece is about 10 minutes – ours is thirteen-and-a-half years. So if we do nothing for five years, we'll have a debt crisis. We've got a deficit crisis – that's the bit we have to try and close, and unfortunately the politicians get these terms mixed up. Our debt's very well managed in East Croydon – there's not much happening in East Croydon, but the debt management office is really good. Remember, it's not managed by the Treasury, or the Bank of England, or the government – it's a separate unit, reporting to the Treasury. So our debt's well managed, and we need the austerity therefore to give people confidence that we're managing it, and we do need to cut out the more state expenditure, make ourselves more efficient, but we are not some kind of wisteria which you hack down in winter, and suddenly we blossom again in the spring. You need to nurture the growth. The good news actually in Britain is, we start 400,000 businesses a year in this country. You go back 30 years ago, it was half that. So unfortunately, the death rate's about half, so we'll die in three years, primarily because banks are lending, or they're not providing capital, but that's another issue, because it comes back to my hoary old subject of the stock exchanges. Remember the days, back in 1945 – actually, we don't remember, but our parents would remember – in 1945, there were 45 stock exchanges in Britain, raising local money for local business, and when we created the London Stock Exchange, it was the perfect opportunity to create a single edifice for the Russians to money-launder – sorry; to float their businesses in London, but does nothing for small businesses. Even AIM doesn't really do start-ups in the same way. So I'm a great enthusiast towards these crowd-funding structures, and making them regulated, and almost creating local investment structures for people to be able to use. But no, what I want to be able to see is this government focusing on smaller businesses, and rationalising, making sure there's a package for small businesses to really get it going, because there's parts of it there, but it's not joined up, and also simplifying the tax system. There are only two main taxes in Britain: you've got income tax, and then National Insurance – the politicians start frothing at the mouth then, because they say, "No, no – that's your pension scheme!", in which case, ask them – "How much is in my pension scheme?" – "It's a nice, round number, it is – nought. There is nothing in your National Insurance." So, it's income tax. So income tax, National Insurance – the other one's VAT. Everything else is tiny in comparison, even corporation tax is relatively small. By the time you get down to stamp duty, capital gains tax, inheritance tax, you're down to pence. It really is very small in comparison. Then after that, you've got sin taxes, and going to the airport. What is the point of stamp duty? Its original aim, of course, was to pay for the war against the French – perfectly laudable, but actually a little out of date. It stops people spending money. When you move house, you change the kitchen, you change the bathroom, you change the carpets, and you send in the Poles, or whichever East European builder you're using. You'll spend more money on VAT than you will do on stamp duty, or the government will earn more money from it than stamp duty, and if you speak to the Treasury now, they say, well, we don't earn much money out of it. Why not? Well, it depends on housing transactions. Well, there aren't many. Oh, well that explains why we haven't got much coming in then. I mean, it's just bonkers. So there are things they could do to actually galvanise the economy, to get things moving, and this is all about proper leadership, because leadership inspires confidence, not to say that everything's going to be fine and dandy. It's going to take a long time to actually turn this round, but to give people the encouragement to say, employment is going up – we've got more people employed in this country than we've had for nearly twenty years, and they're paying tax. So we're in that sort of situation where we are now creating jobs. We've got more people coming out of the public sector, jobs are being created in the private sector. There's an awful lot more to do, but they need to actually get the message across that actually, you can get more dynamism in this economy, because you see the small businesses on the business parks – they've changed. They've cut themselves down, they've adjusted, they've changed – they're surviving, doing OK, and they're going nowhere near that bank, because they don't trust the banks, and there's another key issue the government should be doing, is bank reform. This time last year, I think we were talking about bank reform. In the past year, what have they done? Not done any bank reform.
David:
Now then, just recently, the ratings agencies have put the UK on negative watch. I think it's Moody's, Grumpy and Dopey, yep?
Justin:
Yeah.
David:
Now then, how much store should we put in the fact that these rating agencies are turning negative on the UK's debt?
Justin:
I think really, we should have realised, we haven't been watching this for some time. Do I put much store by them? No, I don't, but the fact is, we're probably going to lose the triple A rating.
David:
Do you think so?
Justin:
I wouldn't be at all surprised, because if you look at where our growth is coming from at the moment, it's not with our baileywick. We've got other areas – if the euro's going to be weak, if America doesn't come through, then it's going to be low and slow. I hope we do keep it. We should prepare for the fact that we might lose it, and what happens then? Well, actually we've seen that, nothing really. So I would almost say, just get it out the way, just accept the fact that we're not going to have it for the time being, and carry on managing it through. The debt management office, I suspect, has probably already programmed this it. It won't increase our debt a very great deal.
David:
It won't – it won't push up interest rates?
Justin:
I don't think, it'll have a very marginal impact. It depends how the government reacts to it, frankly. What they should be doing is putting out more messages actually saying, look at the progress being made. The deficit has come down – it's gone up a little bit recently, but they are making progress on it, and I've been quite encouraged by some of those signs. But they need to get the confidence back in the market, so people say – OK, I believe you.
David:
Let's turn to the Bank of England, Justin, because the Bank of England is going to appoint – well, it already has appointed, for next year, Mark Carney, who is currently at the Bank of Canada, to come and run the UK bank. What does that tell you, that we can't find somebody here in the UK to run the Bank of England, and yet we have to go all the way to Canada to try and find somebody who is going to run it?
Justin:
I find that really rather sad. The thing about the Bank of England, the Bank of England has always, and unfortunately this has changed, and when we go back to the days when the FSA was formed, it had a lot of its powers taken away; it had a heritage of knowledge and history in there, from the people who had been lifers at the Bank of England, and of course, it's not just about banking – it's understanding how the City of London works, in all its complexity. Now, with the best will in the world, Canada isn't quite as complex as that. Sorting out maple leaf futures is probably not quite the same. Yes, of course, their banking system was, got through it all, it's fine and dandy, but it's a lot simpler than what we've got here. This is the world's largest foreign exchange centre, a big derivatives centre, big stock markets, so there's a lot more moving parts than you would have in Canada.
David:
Are there any moving parts in Canada?
Justin:
I think there's a saw, to get the trees down. So it's nice to have some fresh blood in here – I just don't know quite how much experience he's got, compared to say somebody like Paul Tucker, who actually did have the depth of knowledge and understanding to realise not just what to do, but who to speak to, and how to speak to them.
David:
Now, Mark Carney has already stated that, when he comes to the UK, he is going to scrap the inflation target, and instead he's going to go for growth. He's going to try and keep interest rates as low as possible. Now, there are some people who are really against this, Ros Altmann being one of them, saying that this is really going to be another stealth tax, if you allow inflation to get out of control here in the UK. Now, are you worried about inflation?
Justin:
I think we should be very worried about inflation. The problem is, when does it come? Because it's lurking underneath at the moment.
David:
There is something rumbling underneath, yes.
Justin:
And it's a different inflation from those of us who remember the UK inflation in the 1970s, which was primarily wage-led inflation then. Now it's very different, and so you can see this in terms of, particularly soft commodities, in those areas – that's pushing up. So the concern is, how do you actually watch this, not just in terms of inflation, but in terms of the gilts and the bond bubble that is there. At what stage does that change? None of us actually know, but you've got to watch it very carefully indeed. He's right, to an extent – you have to have some growth in there, of course you do. Does that mean you ignore inflation? No, of course you don't ignore inflation. It is lurking there, as a snake underneath it, and as this coming year, of course, is the year of the snake, perhaps we should even be more wary.
David:
Well, I'm glad you mentioned the year of the snake, because I'd like to go all the way over to China now, and have a look at their new leader, a Mr Xi Jinping. As far as Xi Jinping is concerned, how will China change under his leadership? Because he does seem quite radical.
Justin:
A natty array of suits – they look remarkably like the last natty array of suits. I think someone could actually – can't one of our great tailoring brands go and do something for them there, bring it up-to-date? It was fascinating, the past year actually has been rather worrying. Was it going to be Bo Xilai, and the extreme Maoists?
David:
It could have been.
Justin:
Or was it going to be Xi? And the answer is, he's got it, so we're dealing with the pragmatists, and that's good news. Now, the pragmatists, of course, have had to put up with the abuse from America, which frankly I found quite appalling, because the Americans are blaming just about everything on the Chinese, and I've been in certain circumstances where I've had a Chinese manufacturer being shouted at by an American journalist, and the Chinese manufacturer was saying, "But I was asked to produce these goods for America, because you're not making them, and now you're accusing me of dumping goods!" "Yes, but they're too cheap." "That's what you wanted!" – and it's just madness. The good news is, and this is good news – China has to go through this huge change of life, because the export model isn't going to work for the time being. Whether it's Joe Schmo, or whether it's just in the west, buying stuff, we're not going to be buying at the same level, so it's going to be more domestically-focused. This is a big change of life for China, but nonetheless they've got the reserves to be able to do it. China doesn't stop growing – of course it'll keep on growing. It's got the biggest users, as we all know, of the demographic issues, and how the populations' moved to the city, and it's going to be a net importer of food probably forever, so it's a difficult one to try and manage.
David:
Have you been to a Chinese banquet? Have you seen how much food they eat?
Justin:
Absolutely! I don't get past the third course. But the point is that they go through this change of life, and China is in the best position now to be able to do it. They've got the reserves to be able to do it, and the only way to try and actually control their banking system, their somewhat imaginative accounting system, is with a level of discipline and control, which they can probably apply to it. China will still grow. The growth figures in China – I don't believe any of the growth figures coming out of China. It's a bit like having one hand in the fridge, and the other hand in the oven – what's the temperature? – well, somewhere in the middle. The answer is, it varies from wherever you're going. Yes, of course we get coverage of the civil unrest and things like that in certain areas, but that makes for good publicity on the media. So, I think China will actually, is already showing signs of stabilisation from its slowdown, and you're going to start seeing more growth coming out of China.
David:
But in the case of Xi Jinping, he wants to drive domestic growth in China. What does that mean for us over here?
Justin:
What it means, in terms of investment, or in terms of goods?
David:
Well, in terms of investments over here, what is going to happen to the manufacturers over here? Are we going to be exporting more of our stuff over to China?
Justin:
Well, funnily enough actually, you are, because you're already beginning to see actually in manufacturing ...
David:
Do you think there'll be a shortage of red braces over here in the UK, when the Chinese start deciding that they want to wear braces like Justin Urquhart-Stewart?
Justin:
They've got to start getting the right calibre of braces. Mine are all British-made, by Chinese. What we're already seeing actually is, certain manufacturing, and it's the high-end manufacturing which is doing well, exporting to China. We've seen some of it actually come back, certainly we've seen quite a bit coming back to America, but there's things like the transport costs, and all those elements. China focusing domestically – what impact does that have? Certainly, it'll affect in terms of Australia and all the minerals, and Chile and their minerals, and Brazil, of course, and that reflects directly on the FTSE 100, so we'll see that benefit overall. We will see also, in terms of China, the continuing theme of the Chinese consumer. The Chinese consumer isn't going to stop buying. They've only just learnt what to do! – and they love the brands, and they'll continue buying the brands, so it's not just China. For that, you can read south-east Asia as well, as we both well know. Our families are cluttered with it, if my daughter buys any more, so I'm quite enthusiastic with that. If China then resets its economy and starts growing, America gets its political deal, and Germany gets its political deal, I've got three boxes here with pretty mild ticks, but they're ticks in it, not crosses. That's looking more encouraging. The one that doesn't have a tick in at the moment is Britain.
David:
Why is that?
Justin:
I just can't see where the growth comes from at the moment, until we can actually start having a little bit more stimulation and enthusiasm, and unfortunately we've got politicians – I know it's a corny line, but they've never had a job, and a definition of a job is waking up at 2.30 in the morning, wondering whether your company still exists or not, and I don't think Mr Osborne has that. I know he's got a cursory connection with a wallpaper company, and Millipede the same as well. So, any political colour – they're all the same, and you tie that together with some of the lack of experience in the Treasury, and I am slightly concerned, that they don't understand the cycle of actually what happens in the economy. I think most of the civil servants seem to understand a cycle as having two wheels, and it helps them get to work, not actually gets the economy moving.
David:
Now then, I'd like to stay in Asia for a little bit longer; in fact, I'm going to stay there for a very long time, because I think Asia is where the growth is coming from.
Justin:
I'll join you.
David:
When I was in Singapore recently, the Singaporeans were very, very concerned about the printing of money here in the west, and they were concerned because the printing of money in the west doesn't seem to be staying in the west, but instead it is being exported out to Asia, forcing up asset prices in Hong Kong, in Singapore. I'll give you an example: Singapore house prices have gone up 50% since 2009, and in Hong Kong, they've doubled in the last four years. What is this going to do to the Asian economy, to see these asset prices rising so quickly?
Justin:
Well, this is destabilising, but we've discussed Singapore for decades, and that property market, which never, ever goes down, and for tiny little council flats, HDB blocks, which are ...
David:
A million Singapore dollars, they've sold – for the equivalent of a council house over here, that's half-a-million pounds.
Justin:
It's ridiculous, and that's not sustainable. Does it go off with a big bang? Well, the answer is, at the moment there's no other choice. Singapore is the exception, because it is a nice, stable little island in the middle of south-east Asia, and with the best will in the world, Jakarta ain't ever going to be the same, so it's never going to have that level of stability and organisation to it.
David:
So, what I'm getting at the moment is that the west is going to carry on printing money; China will continue to grow; inflation is going to be a problem – so what should investors be doing about it?
Justin:
Assets, assets, assets. You'll be investing in companies which have actually got assets, and companies which are actually making money – a bit silly, if they're not making money, but those where you can actually see the tangible trade coming through. So in my view, there's still the mining companies are going to be doing, what–
David:
Do you think so?
Justin:
They're not going to disappear.
David:
You almost sound like Jim Rogers, because Jim Rogers is really keen on the mining sector, and the soft commodities.
Justin:
He does get very, very excited about that. But no, unless you actually think China's going to stop, they're still going to be there, and so is it going to be the boom levels before? – I think it is probably much more stable. Soft commodities, I would agree, but of course, the trouble with sot commodities, they are incredibly erratic; why? – you only have to look at the weather, and the variations. Only this week, suddenly we've had suddenly a boom in sugar in Brazil and the price crashes. These are unpredictable. So yes, the longer-term theme is there, but beware that volatility of all of those, and particularly if you're trading those through ETFs, you have to be careful, because of the structures of the futures market in there, in contango pricing, and things like that; so, there's that. Also, in terms of retailing, the retailing of brands – I still love brands. These brands will continue to sell, and that will be a continuing theme overall, and I don't mean just in China, but in south-east Asia. Again, they've learnt to shop.
David:
Did you see the results from Inditex, the owner of Zara, recently? – profits up 57%
Justin:
It's eye-watering. With the best will in the world, I would never, ever have predicted that. I know they were doing quite well – that well?
David:
Well, that's because all the people in Asia are buying Zara. In the shopping centres, there are probably more Zaras than there are over in Spain and the UK put together.
Justin:
It is remarkable. So those are continuing themes.
David:
So you like brands?
Justin:
I like brands. Those all can continue quite happily indeed. Now, let's add to this as well something in terms of other areas that may be of benefit. We've also already seen the European markets, actually strengthen quite considerably from the summer, mainly because of the change of attitude from the ECB – they'll do everything that is necessary. If the German election does come through with more of a growth policy, then I think you'll see more of those companies starting to spend, so it's high-quality, German, I have to say, mostly, engineering groups and such like, the likes of Siemens and those sort of ones, are going to be great businesses which will be benefiting again from a broader encouragement in the rest of the world, and I get fed up when I hear on the BBC quite often that the global economy's growing at record low levels – it's growing at 3% - that's the long-term average, it's OK! And next day, it'll probably be a little bit higher, so actually, I'm quite encouraged by that. Then also, to that you may also add some of those larger-sized Americans as well, particularly if you're actually in a position where you've got, if you're investing from sterling, into a weaker dollar, but we'll have to see what happens there.
David:
I am hearing the B word here? Am I hearing the bull market from Justin Urquhart-Stewart?
Justin:
I'm a bit more positive, which is probably the kiss of death to the entire market. I'm now seeing – and of course, now we have to be very careful – what happens in economies, and what happens in stock markets, are two very separate things. But, if I can see a change in sentiment here, and I can see corporates releasing cash because they need to, they can't just sit on the cash forever, and start actually some M&A, and some other developments, then I can see more positive things starting to occur. So, with a new presidential term, if he can get his agreement, then the next four years will be his legacy, to try and show that things are improving – that's better news. The eurozone, it can't get any worse, can it? – yeah, it could do, but actually, I'm a bit more positive there, and China and south-east Asia will continue to do what China and south-east Asia has been doing over the past few years, but China goes through this change of life, and actually I think they've got the right leadership to be able to do it.
David:
OK, let's look at the flipside of that, Justin – where do you think the likely banana skins will be in 2013?
Justin:
I think you have to be really careful of anything to do with treasuries, and government gilts. The yields, how low can it go? And the answer is, if we're heading towards deflation, remember Japanese yields are half ours so it could go lower, so those prices could go higher, but is that likely to occur? Not in my view, so I think you have to be really careful of those, and actually understand what's happening there. So I'd be really rather wary overall.
David:
What about Greece?
Justin:
Yes.
David:
Greece is what I call the Jenga block right at the bottom of the tower, and what is going to happen to Greece?
Justin:
Greece, in my view, it is obviously to the Greeks, but the eurozone isn't so much a financial issue, it's a political issue. It's 2% of the eurozone, so overall it's tiny. So the question is, do they actually want to just kick Greece out, and let it carry on? It's very difficult to untangle. I have to say, if I were a Greek leader, I would seriously have been looking at it, because frankly, what's your primary export, or your primary income, apart from taramasalata? It's actually holidays, so are you going to go to Turkey, or Greece? The water's roughly the same; in fact, it is the same, it's just that actually one is in the euro and one is not, one's a lot cheaper than the other. You think, this is madness! But they are where they are, so I suspect they probably will stay in, but I think Greece, as much as anything else, is this political problem, because every day that goes by, I wouldn't be at all surprised if you didn't see a coup, the return of the colonels to actually take it over – it wouldn't surprise me. We tend to think of western Europe having deep roots of democracy; well, not in Greece – come to that, not in the Iberian peninsula either, but I don't think there's going to be a coup in the Iberian peninsula, but Greece is certainly in a desperate state.
David:
So what about North Korea? Do you think that could be a possible banana skin?
Justin:
Well, now they've got a rocket like that, and now they've got their banking sorted out with HSBC, anything could happen, I suppose. The geopolitical issues of Israel, Iran, Syria, North Korea, are horrific. Any one of those, or a combination of those, could cause severe problems and issues, and certainly North Korea, with its rocket, and if it cares to give that to Iran, and if they've got any form of dirty bomb they put on it, all bets are off, aren't they?
David:
OK, that's quite a good note to end on. At least we've been balanced about this. I mean, I am feeling very confident about the market at the moment, but again, there are likely to be some banana skins along the way.
Justin:
Yes. You must be invested. As ever, if you're not invested in the market, you're missing things. There will always be some volatility, and use that volatility to your benefit, but as ever, it's all about focus, and focus and education, and that's why we all need a Motley Fool.
David:
You're very kind, Justin, so thank you ever so much for coming in today. I have one more chore to perform, which is to find the quote to sum up today's podcast. The quote comes from Anon, who says: "The road to success is dotted with many tempting parking places", and I think people try and find excuses to come out of the market, but ultimately what you're saying is, you should just carry on investing regardless.
Justin:
If you're out of the market, you're out of the money. It's not timing the market, it's time in the market.
David:
Very good, Justin! So thank you once again. This has been Money Talk, I have been David Kuo, and my guest has been Justin Urquhart-Stewart from Seven Investment Management. Now, I wish you all a very successful 2013, and a fond farewell, and don't forget to keep investing. Thank you, Justin.
Justin:
I thank you.
David:
And thank you for listening.
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