ILT017 Roger Lee Discusses UK Equities, Interest Rates, Political Risk & the Case for a Re-Rating

Speaker A: Foreign.

Speaker B: Welcome to season two of Investing for the Long Term, hosted by Downwind fund manager Judith McKenzie and investment consultant Rosemary Banyard. In today's episode they're joined by Roger Lee, head of equity strategy at uh, Cavendish, who brings nearly three decades of experience in the equity markets. Together they take a deep dive into the outlook for UK equities, discussing current valuations, expectations for interest rates and, and the broader macroeconomic story driving markets today. Now, uh, just before we get started, please remember that all opinions and information are for educational purposes and do not constitute investment advice. Investing carries a high level of risk and is not right for everyone. Always do your own research and seek financial advice from a regulated financial advisor in your country before making any financial decisions. With that being said, let's get started.

Speaker C: So Roger, I've known you, or known of you for a good number of years, very well recognized and acclaimed market commentator and economist and what I quite like is, I'm going to call it a bias towards UK equities, but I'm sure it's not biased, that's well judged. Your career has not exactly been typical through the years and I think you described yourself in the Cavendish website as an accountant, physics grad and a, ah, frustrated politician. How did you end up in the position that you are in, Cavendish as a market commentator and economist when you've got that kind of background?

Speaker A: That's a great question in a sense, but it all started uh, when I was about 5 or 6 years old actually as it happened, and we lived in a little village in Nottinghamshire. We had no sort of real city lineage or uh, any city background at all. And there used to be this village fete in the uh, in the village every year at the big house. And my mother, who was quite aspirational, came from a fairly modest, this background, said to me that the owner of this big house is a merchant banker and uh, if you want a big house like this, you ought to become a merchant banker as well. And I think from that moment a career in the city had sort of been set for me and uh, the rest, as I say to graduates who I interview nowadays, the hard thing is deciding what you want to do. And then once you've decided what you want to do, it's relatively easy to work back to how you get to that point. And so uh, you know, kind of where it all started. And I was, was lucky that I'm quite good at maths and became a chartered accountant and from that was a fairly recognized route into the city. I was a salesman for A long time. A broker for a long time. And it was quite clear that from a personal perspective and I know you come at markets from a very different perspective than I did, it was quite clear to me that my interest was far more from a top down perspective of what was driving markets from a very much a macro perspective rather than necessarily what was driving markets from an earnings or a fundamental perspective. So when the opportunity came up that kind of led into more strategy macro role than uh, than individual stock selection and um, analytical role. So yeah, I'm very fortunate that um, I don't quite have as big a house as the guy that I saw ah when I was five. But I've been terribly fortunate that my career has been my vocation and I wish everyone could enjoy uh, the same. But uh, yes, that's how it started. Little boy holding his mum's hand.

Speaker D: You did a physics degree is that right? Before the accountancy. So how does being a physicist inform what you do?

Speaker A: I mean I think if you look at the stats of the number of grads that are taken on nowadays, I think you'll find you know there are more grads taken on by the bulge bracket firms who come from a science background or a maths background that come from an economics background. That wasn't necessarily the case in my day but one of the strong sciences brings or engineering or maths, it brings that sort of analytical view and um, it's a hard science, it's not a soft science. Now obviously what we do is a very soft economics etc. It's a very soft world. But I think it helps to have come from a background that deals in facts as much as possible and how you relate what you observe, a theory or the other way around. As Fermi, uh, the famous physicist said, if an experiment doesn't back up the theory is wrong. And I think it's these sorts of ideas that uh, really help inner city background or financial commentary. It provides a rigor. I think that some of the more arts based degrees don't bare ends the commercial for uh, physics degrees.

Speaker C: But that being said you're known for getting to the point in what you write and making it engaging and interesting. So you're probably doing yourself down a little bit in terms of that a scientific bend that you've got. But I need to go back to the last bit of your, your cv. What's a frustrated politician?

Speaker A: Well that brings it all together. I tried to stand or try to get selected twice as a conservative candidate. I don't know whether I can Mention the politics.

Speaker C: Yeah.

Speaker D: Sorry, it's. After all the by elections, I, um.

Speaker A: I guess I hate using the word passion, but other than markets, I have a significant interest in politics. So it seemed only natural in my 40s that I would pursue that. I tried to get selected twice as a Conservative candidate to represent Lincolnshire, which is where I come from. And, uh, the Conservative Party saw differently to my own aspiration, and I was unable to even get on the approved list, let alone contest the seat. So not only have I a, uh, passion for politics, I'm also the most unsuccessful politician because I didn't even achieve to get onto the Conservative approved list not once, but twice, I think. Now I kind of view that as a badge of honor and a sign of my integrity as much as anything else. But no, this is back to any politicians that may be listening. But where I think it is really interesting, clearly at the moment, over, uh, whether you're looking at US politics, whether you're looking at UK or European politics, this conflation between politics and markets, Ah, I don't know, Judith. In our careers, I don't think it's ever been stronger. So again, I think I'm quite fortunate that perhaps my background and my interests sort of suit the market that we are seeing in front of us today. I suspect, had I been 20 or 30 years older and we'd been having this conversation in the late 90s, uh, I doubt politics from what I recall, didn't have a particular bearing on markets. You know, I think I can say the same. The first half of my career, I didn't know what the guilt yield was. Now, of course, we know what it is to sort of two decimal places. So. And that really, I think, is how things have changed over the last 30 years. But yes, politics now very much a, uh, hobby rather than a, uh. Any aspirations to change the world can

Speaker C: change the world a different ways, I'm sure.

Speaker A: Comment on the world, perhaps.

Speaker C: Exactly. Commenting part of the.

Speaker A: Part of the commentary so I can try and comment on the world. And you know, I think that's an interesting. And you said, very kind and said about my style and my approach to following markets. And I think this really comes, you know, there is no point knowing something or feeling, you know, something without being able to share it. And I think how you share your information or your views or your opinions, I think is critically important in this business. And, uh, what I try and do, if there was a sort of a method to this, is that I try and tell stories. And I think that's how we humans understand things best, whether it was a teacher in class or whether I guess going back millions of years it was telling stories by the fire. And I don't see financial markets and, or politics as any different to telling stories. And that I think is what I try and do and therefore make markets more approachable and perhaps more understandable. You know, what I find extraordinary is that whether you're talking to some extremely serious senior and experienced cio, uh, the ability to communicate is the beginning, the ability to tell a story. And I think that goes down well, whatever the level of experience the person you're dealing with is.

Speaker C: Yeah, very true.

Speaker D: Where are your biggest audiences? Uh, would you say? I mean, is it asset allocators? Is it hedge funds, Is it macro funds? Or is it people like us who run actually individual equity portfolios?

Speaker A: Well, when I started off, basically you and Judith and people like you running individual equity portfolios were my audience and my client base. But over the years that's morphed into the broader institutional market. So very much asset allocators. That's obviously an important part the global hedge funds, but maybe probably under index on those, which has been just the way the business has evolved rather than anything else. Uh, the private client world, the global allocation within the private client world and the other audience, of course I think, which increasingly are uh, taking a very much an interest in what's going on from a macro or political perspective is the corporate market. There is a real thirst for boards to particularly try and understand, and we may touch on this later on, why their share price trades where it does. I'm sure we will discuss it, but you know, why their shares underperform when they seem to keep delivering. And I think having someone like me try and put this into a sort of a macro global context, they find it quite valuable. Um, what I do find is the audience for macro commentary is almost endless. Most people, whether it's a CIO or a macro hedge fund manager to a non executive director on a board, to an individual, though not necessarily. We deal with a lot of individuals, but maybe more high net worth, they all have an interest in markets because it touches our lives in so many ways. It is the reality of what we live in. Most people, whether it's through a pension scheme or direct equity investment or shares in their company, have some interest in financial markets that I think is a, uh, enduring interest. And fortunate for people like me because it means that the audience is as broad as it is wide.

Speaker C: One of our frustrations has been that, um, education in schools has not been as good as it should be, uh, with regard to money or generally, but also markets. And is that something that you've become involved in over the years or is it a passion that you share?

Speaker A: I think there's definitely an argument. In fact, as it happens, I recently attended a debate in the House of Lords on that very subject about how to increase awareness in schools. I'm not sure if it has happened, please correct me if I'm wrong, but I think there was some elements of this were actually being proposed to being included in the national curriculum. You know, I'm not sure necessarily whether that's happened yet or not. I think it is really important. I mean if you go back over my life, you know, the number of people doing economics A levels was relatively small, early 80s, mid-80s when I was doing my A levels. You know, I think the number of people doing economics A levels at my children's schools, probably the most popular degree. So to an extent this has already started to happen almost by default rather than anything necessarily the government has done. I think you're kind of touching on other questions here as well about why is the US is, has a, uh, far broader financial uh, equity ownership culture than the UK and uh, Europe. And I think it is changing in the uk. I think it is changing. I've certainly seen it changed over my lifetime. But we've had ebbs and flows in that. And if we go back to the late 80s, you'll remember this. Hotelsid campaigns, the privatization campaigns. Equity ownership was extremely common. And I remember doing a presentation to Mr. Kilik who set up Killick and Co and he was telling me that in the late 80s the Killick share shop in Debenhams on Oxford street was the most profitable, difficult piece of real estate within Debenham Store. Well these things go in cycles and uh, certainly back in the late 80s, you know, it was very difficult uh, not to be exposed to the share owning culture and um, that has ebbed and flowed a bit.

Speaker D: Yeah, I'm bound to say. I mean my dad first got involved in the 80s because he worked for BT and he got shares in the privatization. So he had kind of had to make a decision because as an employee he got quite a good allocation potentially. So that.

Speaker A: And did very well out.

Speaker D: Yeah, he did, yeah.

Speaker A: Well the first share I ever owned was I was involved in setting up the investment club at school. And uh, we stagged Reuters, stagged younger listeners purchased it on the IPO. We stagged Reuters in uh, in 1984. And did quite well out of it I seem to remember. So yes, there was a lot more of an equity culture in the 80s. So again is an interesting observation this, that you know we, we didn't need any education. It was, it was just around us in the 80s and then I think it's, it sort of ebbed and flowed and I think the you know, regulation hasn't helped. I mean this is a whole separate subject. I know Judith's very keen on this in that uh, you know, the government regulation and Solvency Acts etc. With insurance companies trying to force uh, direct benefit schemes to own more fixed income than equities. So there's been a lot of other factors in education that I think has changed the equity owning culture in the uk.

Speaker C: You've obviously got experience US global markets, but again going onto that point that you know you're uh, a big supporter of UK markets as well and that's backed up by data. Um, and I think you worked in Hong Kong at some point as well. But what kind of drew you back to looking at UK equities in particular and uh, coming back to the uk

Speaker A: it was where the work was. We had a very good few years in Hong Kong basically selling um, European and US equities into uh, Asian institutions. And so this was when I was at Deutsche bank and this was a very good business for a while. But um, the European sovereign debt crisis at the time was all engulfing in Europe. Fortunately we missed most of it if not all of it in Asia. Your business priorities within Deutsche bank changed. Selling equities into your, into uh, Asian institution wasn't a core business business close or they shut the business down and that kind of prompted a move back to the uk. As it happens I just happened to move in within UK broking firms that have a specialism in UK equities. From my perspective of how I look at the world, I don't think it necessarily changes things usually because you have to look at all equity products through the prism of US equities. It is just possible not to uh, whether the specialism just happens to be small cap or mid cap UK equities I don't think necessarily changes the story anymore. And in fact one of the things I find very rewarding is when you're talking to, let's say an AIM company, you know, one of the smallest, relatively smallest quoted market cap companies in the UK and I tell them that their share price is trading at a discount because of the uh, largest companies in the world, call them the Mag 7. This is why it is just as satisfying as talking to global hedge funds. I think it's all part telling stories and telling narratives and uh, trying to understand what's going on in markets.

Speaker C: Just coming on to that UK case then. So what's your view? Is the UK a um, fantastic RE rating opportunity or are these companies just cheap for a reason?

Speaker A: I would like to say they are uh, fantastic RE rating opportunities and I have to believe that because I just don't accept this sort of zombie UK market. But I am going to caveat this slightly because I think there are some very specific circumstances at the moment which aren't helping the UK equities. We'll just unpack that question a couple of ways if I may. Undoubtedly UK equities trade at a discount to their long term multiple. What we did see leading up to the conflict was we did see that the large cap UK equities were RE rating and actually RE rated prior to the conflict above their long term multiples. And in fact the FTSE last year as you know, was the fourth best performing major equity asset class in the world. It's not a case that the UK will always trade at a discount, will always trade at a discount to its peers. It needed a set of circumstances in order to see that RE rating. And that's what we saw at the end of last year and that's what we saw at the beginning of this year leading into the conflict. Now the reason why we saw that RE rating so clearly and uh, arguably a sort of a DE rating in the US perhaps because there's two sides of the same coin. What you saw leading up to the conflict and in 2025 you generally saw a uh, loosening interest rate environment where interest rates were generally expected to come down. And uh, in the UK we were expecting interest rates to come down more than almost any other developed market. And that would certainly be a forecast that we would have concurred with. In fact we were expecting interest rates in the UK to come down more than perhaps the consensus was expecting. And then if you think about what UK equities are, uh, we are ah, quite a cyclical industry, a cyclical index. We don't have, we, not necessarily, we don't have a lot of tech in that. We do have a lot of cyclical companies and this is particularly true in the mid cap space. And so as those interest rates start to come down so equities started to RE rate. That was finally, finally beginning to work. Now there are, there was another major factor that was driving the RE rating of UK equities. And this was a phenomena that we saw across the world. Ex US is the policy volatility that uh, Donald Trump had introduced into the US particularly around tariffs. But you can almost trace it back the beginning of his presidency in January 2025. The policy volatility was perhaps causing investors to question this whole idea of US exceptionalism. And then you started to see some beginning to relearn the benefits of diversification. And you started to see that in the fund flow data coming back out of the US into almost any non US asset of which the UK would benefit. And then you started to some sort of questions over AI and AI, uh profitability and monetization. And uh, that accelerated this trend away from the US now not necessarily a massive trend away from the US but just a relearning of the benefits of diversification. So that was all setting up nicely. The combination of maybe questioning US exceptionism and why you would only own US equities and also an interest rate story in the UK will set us up very nicely. And of course then the conflict changed everything. The oil price went up to $120 a barrel. Inflation expectations in the UK just diametrically changed. So instead of expecting two rate cuts, the market was then uh, expecting two rate rises. And so all of a sudden all of the benefits of cyclicality became a hindrance to UK equities. And that's I think simply what we've seen over the last few weeks up until maybe the last 10 days or so since the peace deal was announced and the oil price started to fall. So it's a bit of a nuanced story. I have to believe that value will come out eventually. UK assets and mid cap assets generally across the world trade at fairly significant discounts to global equities. Obviously global equities in this context we talk about some of the largest equities in the world which are in the US and that discount will eventually close. And um, if we don't close it as institutional fund managers then private equity and strategic buyers will close it for us. And that's not, we're seeing what we've even seen today and that's going to be a loss to the uk, uk it's going to be lost to our unitholders, uh, and ah, our pensioners. That is the sad reality of what we're facing. The discount that UK equities trades on is such that companies, strategic buyers are able to pay a typical premium, typical M and a premium and still buy that asset at a discount to its long term valuation multiples. And this is what we're seeing over and over again in the UK and where we're seeing it elsewhere in the world. It's a shame, but, but to me it gives me comfort that at some point that gap, that valuation gap will be closed.

Speaker D: What, um, would you do to improve the landscape for the UK stock market so that more companies listed here and less disappeared?

Speaker A: That is a very complicated question, I think, because fundamentally, from a personal perspective I would disagree with regulation and generally speaking, government interference because that tends to lead to outcomes that you don't necessarily want. I think to be fair, the government have recognized the problem and the stock exchange have recognized the problem. So they are trying to improve the attractiveness of the uk And I think that needs to be commended. There is no doubt that, um, when good companies do list, we can find demand for those. And certainly leading up to the conflict, certainly from our own businesses perspective, we were seeing inquiry levels at uh, reasonably high levels. I think the market backdrop was working in our favor. There's clearly a political will to improve this, but at the end of the day we cannot control the oil price. And that has clearly introduced a level of uncertainty into the UK that um, that has put off some potential listings, at least in the short term. Um, specifically answer your question, what can we do? I think we just. The government has to create an environment that is business friendly. The government has to create an environment that businesses and entrepreneurs want to list and live in the uk. That perhaps leads on to broader questions, but I think regulating pensions or telling pensions to invest a certain amount of money in the uk, UK assets. I'm not sure it's necessarily the right way of doing it. I think prescription rarely works. The only suggestion I would make, and again this is, I stress this is a purely personal view, not the view. You know, we do have a very attractive savings wrapper in the UK in terms of the ice. Clearly a family with two children, if they have the resources, can invest a very significant amount of money tax free. That benefit is paid for by the general taxpayer population of the uk. So it seems to me perverse that uh, you can then take that tax benefit and invest in the S and P. It would seem to me very obvious that if you are benefiting, giving someone a benefit from the UK taxpayer, that that money should be recycled back into the UK into into UK indices. So that perhaps is the only prescriptive element I would adopt because philosophically it seems that the UK taxpayer is not getting great value for money out of that tax break.

Speaker C: Yeah, I think that's very fair. What do you think is the single most important fact about the UK market as it stands today that maybe gets overlooked?

Speaker A: I'd have to say valuation. Just everything in my world comes back to that, as it does in your world. It comes back to valuation. Your listeners don't need me to tell you that the UK equity market is cheap because lots of people say that it's demonstrable with the amount of M and A activity, that the UK equity market is cheap. The overriding most powerful factor for the UK is its relative valuation. I certainly don't discount the importance of falling interest rates in terms of helping that valuation gap close.

Speaker D: So at the time this is being recorded, we've just had our Prime Minister resign and a new candidate appear with great excitement in many places. How much difference do you feel that an individual can make in the situation we find ourselves in this country is just the level of borrowings that we've got, not just simply too high and pushes us in certain directions?

Speaker A: First part of your question. None will make no difference at all unless there is a change of policy, change of economic policy. There is very little or no evidence to suggest that will be the case. So let's just step back a second because I just wanted to tie in what we were just talking about before about valuation and UK equities. And I think I said a few minutes ago that I have no doubt that that valuation gap will at some point. There is also no doubt that part of that valuation gap in the UK is driven by political uncertainty. I'm not making a political point here at all. I'm just merely observing that UK, uh, government borrowing costs are the highest in the G7. Clearly the market, the bond market, international investors who lend the UK government money are demanding a higher return than they are of Italy or other countries that would perhaps is seen to have not have the most robust creditworthiness. And there is, therefore there is one of the contributory Factors to why UK assets trade at a discount, 1, not all of it, but just one, is that we do have elevated gilt yields, financing costs for the UK government and that undoubtedly is weighing on the valuation of UK assets. And I see this fairly regularly. Ashta you talked about, you know, my client base and the world I speak to. I am fortunate enough, I speak to quite a number of European investors and again they come back to me with a very similar story. Yes, we see that the UK assets are cheap, particularly mid cap equities are cheap. But we do not want to take the political risk. If you are investing in Portugal or coming from Portugal or Italy or Germany, you are well aware of what political risk does to equities because they all live through the European sovereign debt crisis that I've referred to earlier. And they look at the UK and I think, good reason. They see that there is political risk here. And that then leads on to, well, why is there a political risk? And it really comes back to the UK deficit and the level of borrowing and the lack of growth to repay that. And so this is all part of that same narrative that at the end of the day you need consistent government that will deliver a growth environment which will help companies perform and that will attract new investment as we stand at the moment. And this isn't just a Labour issue. The Conservative Party suffered from the same. Uh, we have found it in the UK very difficult to generate that growth. We found it very difficult to generate the growth that's required to meet the spending commitments that successive governments have adopted. And so we have, have ended up where we are. This is a challenge that not only the UK is facing, but also, you know, other northern European countries are facing. And unless there is a clear change or a, uh, clearer uh, understanding of how economies grow, then I don't see how an individual, even if he is more popular, more likable, more personable, can necessarily change it. You know, this in many respects to generate growth in an economy is relatively straightforward. You need low regulation, low tax burden and low energy prices. And this comes from Adam Smith. I mean this isn't necessarily nothing new about that at all. It is widely accepted that you need those three fundamental economic planks in place. And you know, there are lots of subsets of each of those and all the rest of it you can talk about. Low regulation is important because it allows companies to grow, it provides less of a hindrance for them. I mean that was very clearly sort of supply side economics of uh, Milton Friedman and uh, what Thatcher and Rager introduced in the 1980s. You can talk about lower taxation, well, that starts to address issues around welfare, bill welfarism, et cetera. And of course lower energy costs is a, is a choice centered around net zero. So if you accept that you need those three overriding force economic forces of low regulation, low tax burden and low energy prices. If you are doing the complete opposite, then why is anyone surprised that uh, you live in a low growth environment? And this is what I find very frustrating is if these are economic truisms to an extent that There is anything true in economics and it goes back to my physics background. You know if you keep doing the same thing and expecting that different outcome then the experiment does not meet the theory. And that's why we. And it's not just the uk that's why Northern Europe, Europe is struggling with this very low growth environment. And so again a bit sort of long winded way of answering your question. Unless there is going to be a fundamental reversal of those three, we are merely just tinkering around the edges and it's uh, I think it's style over substance.

Speaker C: You might just send us an episode into treasury and see if anyone pays any attention.

Speaker A: I don't think they would be surprised to hear talking about this. You don't need to believe me or believe other economists or strategists. You have to look at what's happening in the United States. Generally speaking the US outperforms because it has those three elements. It has very cheap energy prices, it has relatively low tax burden and um, does have a low regulation, it has a lower regulatory threshold than we do in the UK and that's just the reality of what we are faced with. Will it change a lot of what we are seeing now? I don't want to go too far into the 1970s but a lot of what we are seeing now is a sort of of a repeat of some of the features that we saw in the 1970s when I was a child and uh, getting a bit more sort of financially aware. And I do know that it can change and it can change very much for the positive but I can't really see any evidence at the moment that there is a political leader out there. I have to say bade knock came out but some interesting comments at her City forum last week but I know not totally convinced. Certainly anyone in government is starting to acknowledge that some of these key fundamental drivers to growth need to be in place before we actually see growth.

Speaker C: It's very easy to talk ourselves into a doom booth isn't it?

Speaker A: I don't want to be too negative about this because uh, economies are remarkably resilient, companies are remarkably. But it was merely specifically to answer your question will anything change that the new incumbent in number 10 and uh. So maybe there will be some change. There is no question that one of the Great Myths of Mrs. M. Thatcher was that she introduced supply side economics. In fact that is not the case. It was introduced by Callahan and Dennis Healy in response to the IMF intervention in the uk. So a lot of what she was doing was an extension of what was in place introduced by labor government. So it's not impossible, but I don't see any evidence of it. And in fact, what I find quite concerning is that. Let's give a couple of real examples to your audience. I mean me, a couple of real examples. I could forecast that if you increase the national living wage for young people by increasing the cost of employing young people, then there will only be one response, is that we will employ less young people. And I cannot believe that was their intention. And yet that is the reality. And it was extremely forecastable. I mean, you know, 16, 16% youth unemployment, you know, young male unemployment, it cut to 20%. I mean, these, these numbers. I mean, this is, this isn't just an economic stat. It's the sad reality of the uk and that cannot be a good thing in any sense of the world. I'll give you another example. Here's, here's a very simple one. If you increase. And the Conservatives for this one were just as guilty, in fact, they were just as guilty on the national living wage as the Labour Party will. So, you know, clear, these aren't parties on point. I mean, this is an extension of what we've seen over the recent past. But, you know, you take landlord reform. If you introduce more regulation for landlords, if you increase the cost of renting homes out by a landlord, if you reduce the profitability of renting a home out by a landlord by increasing the tax burden on landlords, what do you expect to happen? Do you expect there to be more, More properties rented out or less? Less. It's obvious, you know, again, you don't need a physics background or economics background to work out where this ends up. Uh, you end up with less rental properties and therefore what happens to rents, they go up. Which is completely contradictory to what the intention of, of governments, successive governments were. From an economic perspective, it's quite frustrating because you can see these things playing out in real time.

Speaker D: Slow motion actually as well.

Speaker C: Yeah, yes. Yeah. Looking to see the car crash coming. And it's. You kind of know what the outcome is, but, yeah, it's quite painful.

Speaker A: And so we end up where we are. But again, absolute, to be clear, this isn't necessarily a UK phenomenon. It's been a phenomenon probably across, certainly, uh, across European, uh, markets now for quite a few years. You know, we are not the only country in Europe that has very high energy prices.

Speaker C: You know, so the title of this podcast is Investing for the Long Term. Um, and both Rosemary and I are long term investors, but it's quite easy to feel a little bit paralyzed sometimes given some of the macro backdrop that you've talked about. Give our audience one bit of advice.

Speaker A: What would it be if you genuinely believe in the long term? Um, and I think this is always the problem, you have to believe that valuation will always come out. You have to believe that I think we've been talking about, specifically in the context of UK equities, uh, over the last couple of years is that corporates and strategic buyers recognize that value. Eventually that value will be recognized more broadly. And I think you have to believe that the valuation will come out and it does eventually. And we uh, have this expression as both of you know, that stocks rise to a buying level and you know, at times it looks as if stocks will never ever pick up. They will never reflect their true value. And I always take great company. But looking at the UK bank sector, for years after the financial crisis, successive bank analysts would tell me, oh, you know, the UK banks are trading at half fork or whatever they were trading at. And people would say, investors would say, well, they will never re rate because of XYZ structural reasons was the perfect legitimate view. And of course now the UK banks have re rated, uh, back up to broadly speaking European peers, maybe not quite as much as the us the US banks but got different kind of makeup and different regulatory backgrounds, et cetera. But so it can happen and it does happen and it will happen and it just takes time. Now I would again want to stress a positive, just to conclude is that uh, we have over the. Just over the very recent past, as in over the last few weeks, the conflict, we have had this interest rate environment that has. Was suggesting at one point there would be three interest rate rises. Now that is not good for UK domestic and that's not good for a kind of UK plc. We very much believe that the oil price will normalize as we are sort of seeing at the moment. If the conflict, if the piece holds and the Strait of Humerous, which we're all now so familiar with, returns back to some sort of normality. We think the oil price will normalize rather quicker than the market's anticipating. And that's really based on. Not that we follow shipping traffic through the strait or anything detailed like that, but basically what happens happened in 1991 and um, after the first Gulf War. And then the oil price, broadly speaking went back to where it was pre conflict very quickly after the liberation of Kuwait. Not because supply had normalized, not because all the energy was. All the energy plants were fully Working again. And in fact if you recall that uh, Saddam had set fire to almost every single oil well in Kuwait but because the market was anticipating a normalization and that's what's important. Secondly, it does look again, people may have forgotten this within the uh, what in the noise of the conflict that the UAE have pulled out of opec. And that is also important because you know again going back to my childhood, we've lived with OPEC control of oil prices for virtually the last 60 years and OPEC now looks to be not remotely the force it was. So we're already starting to see, or people are already starting to talk about the idea that the market will be in oversupply post conflict if the polls very important, conditional and in fact it's not unreasonable to assume that if we take a combination of 1991 and what say happened between 2014 and 2016 when the market was seeing an oversupply of crude oil, that the oil price could fall quite materially. Now if that happened then the inflationary impulse that the market was so concerned about during the conflict reverses and reverses to a deflationary impulse. That is just the maths, that's how the in arithmetic work. That would require a very different bank of England response. And so if we started to see, as we are doing right now, interest rate expectations falling in the uk the UK still in fact is the only developed economy where there is a significant scope for interest rate cuts. Eurozone rates are two and a quarter, they just put up rates by a quarter of a point two weeks ago. The us, the new, the new Fed government of the us as clear as you possibly can be that rate cuts are off the agenda for the time being, which is a different subject. So the UK amongst um, those developed market offers the most scope to cutting interest rates and that is a very positive for uh, UK domestic stocks. And um, we've already started to see this over the last ten days or so. If we can disaggregate some of the political risk, if we start to see the oil price falling, if we start to see see interest rate expectations coming down, then that is a very positive backdrop to seeing some of this re rating.

Speaker C: I think that's really helpful because I often get asked what the catalyst is and you just articulated it there.

Speaker A: Again this is why I do my job and uh, you guys do yours because uh, I look at this from a very top down perspective and the correlation between the FTSE to 50 mid cap equities in the UK and interest rate expectations is very High, and particularly very high amongst certain sectors, as you would expect, you know, way more than you would ever really anticipate a real world environment. As much as there are, uh, economic truisms that we've touched on this a couple of times, or market truisms, I think interest rate expectations for them in the UK is probably the single most important factor that determines the performance of UK equities in UK plc. And I hope that I've shared a, at least, uh, some thoughts about why those interest rate expectations should come down fairly quickly. And I would also add that a lower interest rate environment, notwithstanding all of the sort of fundamental concerns one has about government policy and government choices, lower interest rates, generally speaking, would help growth as well. The single most important missing piece for the UK at the moment as we

Speaker D: draw to a close. Ask our guests if they can recommend a book or uh, a podcast that you're enjoying.

Speaker A: Yes, I would urge everyone to listen to the Rest Is History in Dominic Sandbrook's podcast for the 1970s, and you can then draw your own conclusions over where you think there are similarities and where you think there are differences between what we are experiencing now. I think Dominic Sambrook is one of the great modern historians hit by all great commentators of modern history and I think that's um. I think his series of the 1970s gave a very clear understanding of perhaps some of the issues that were being faced then and uh, what we're facing now. So I would definitely urge that yes, in terms of a book at the moment, I'm really a great spice rather about uh, about Moscow and Russia and uh, what's going there. David McCloskey. But I think that's more for escapism rather than.

Speaker C: We like escapism as well. Uh, and what is it? What's the name of it?

Speaker A: David McCloskey. Oh, I just forget the name of it now.

Speaker C: Actually at the top of my head we'll find it.

Speaker A: That is purely escapism. I was great. I could think of something more highfaluting.

Speaker C: That's a great combination.

Speaker A: Rest Is History and uh, Song for perhaps pure escapism. Maybe something like David McCloskey, which is a great spy thriller, and uh, a Moscow X. And I think that's uh. He also did one about uh, Damascus and uh, Syria, which was a bit more disturbing. But uh, yeah, combination.

Speaker D: Great.

Speaker C: Roger, thank you. That's been reassuring, educational and yeah, just as you said, you're a fantastic storyteller, but you do it with economics. Um, so thank you.

Speaker B: Well, that's it for today. Thanks for listening and in our next episode, Judith and Rosemary will introduce you to another key person from their extensive network from across the investment sphere. If you liked what you heard, please subscribe and leave a comment. And to learn more about Judith, Rosemary and Downing, please visit www. Downingfundmanagers.co.uk. all the links are just below in the show notes. Thanks for listening and we look forward to speaking to you in our next episode.