Investing in Emerging Markets, & The Canary in the Gold Mine
Summary
Market Performance: The Vanet Crypto and Blockchain Innovators ETF has surged 50% in eight weeks, reflecting strong performance in the crypto sector.
Global Market Trends: The US government shutdown has not impacted markets significantly, with new all-time highs in indices like the DAX and Bitcoin.
Japan's Economic Developments: Japan's stock market hit a new high following the appointment of its first female prime minister, who supports pro-business policies.
Currency Dynamics: The US dollar has strengthened against major currencies due to political turmoil in France and a weaker yen, impacting global trade dynamics.
AI and Semiconductor Investments: AMD's deal with OpenAI highlights the growing demand for AI chips, with strategic investments in semiconductor companies being crucial for future growth.
Emerging Markets Analysis: Emerging markets, particularly China, India, and Taiwan, present opportunities but come with political risks, with China being a significant part of the MSCI Emerging Markets Index.
Investment Strategy: The podcast suggests a cautious approach, balancing between high-growth sectors like crypto and more stable investments like mining and emerging markets.
Portfolio Adjustments: Recommendations include reducing exposure to high-risk assets like the Vanet ETF and increasing investments in world mining and emerging markets for diversification and potential growth.
Transcript
and you'll see it's been an absolutely fantastic weekly performance. The Vanet crypto and blockchain innovators is now up 50% since we bought it. I'll repeat that. It's now up 50% since we bought it 8 weeks ago. >> I think what I said before when we were talking about selling someone it was 30% up. It's now 50% up. >> Smart. Just to to push you there. Would you want to be invested in emerging markets exchina or emerging markets with China? >> So when I look at things, there are two things I saw this week which make me go I wonder. >> Oh hello. Tell me more. Your capital is at risk. The value of your shares, ETFs and ETCs can fall as well as rise which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to episode 14 of The Art of Investing brought to you by IG, the global investing platform. Now, difficult decisions to be made this week. Potential for the bulls and the bears to butt heads, but as always, we will start with the spice market update. Thank you, Rich. Well, we're into the second week of a US government shutdown and markets are completely shrugging off. New alltime highs pretty much everywhere, including the DAX. Woohoo. >> That was last night. That's great. Even Bitcoin eaked out a new alltime high. Yes. So all sorts of other assets are now beginning to catch up with the leaders that have been the US and the Footsie again hitting new time high. >> Sorry, but you're saying the Footsie was a leader as well though. >> Yeah, this time >> albe it briefly. >> New alltime high. >> It was earlier this week, not now. Uh anyway, one of the other big news that stories this week was in Japan and one of the reasons the Nikai hit a new alltime high. As we expected and we sort of speculated, uh Japan have had their first woman prime minister. Uh San Taganichi um is coming to power. Um remember said she was a bit of a Thatcherite uh which a lot of people will sort of make their their skin crawl on hearing that. But that's positive for stock markets. Um, and she's pro business, pro- stimulus, uh, and supports increased public spending and easier monetary policy. And those are all things that help equity markets. And so the nick eye hit a new alltime high this week. In fact, it's up about four or 5%. I think wasn't great for the yen, was it? >> No. And that's but that still ironically helps the underlying stock market because a lot of Japanese companies are exporters. And when your currency falls, when you're manufacturing in that country, you better basically get a competitive advantage against a country where they have higher currency rates. Um, and that's ironically one of the reasons UK exporters have benefited over a long period of time because the pound has tended to fall over a very long period of time. So there's swings and roundabouts >> and and and it's important also to think about that in terms of what Trump's Trump is up to as well. you know, Trump wants to ease off the dollar if he can, not too obviously, but just drive it down a little bit, which helps then the export performance of the US. So, there's a lot of people who wouldn't mind their currencies coming off a little bit. Um, and it's just a question of of how quickly they do and how controlled that is. >> I think that was called race to the bottom about 10 years ago, wasn't it? >> Well, interesting. Actually, the dollar has had one of its best weeks in a very long time. It's up over 1% this week against a basket of other currencies like the euro, the Japanese yen and the pound sterling. Uh and part of the reason for that is obviously the yen has been weaker. And the other reason is because of the political turmoil in France which has continued this week. We saw Sebastian Lacron um basically have to resign um after he couldn't get a budget together after just get this 26 to 27 days I think he was in power. >> I think that beats Liz Trust doesn't it? >> It does. Liz Trust made 49 days. So the French political turmoil is even worse than ours. And uh we'll see what they go. But there there is some speculation there may be uh you know there may be a need for a snap election in France. But that combined with the weaker yen and obviously a forthcoming budget in the UK has led to a combination of those currencies being weaker, the dollar being stronger. Also in America, uh Trump and his team have been busy at work buying yet more stakes in yet more companies. This time they're chancing their arm a bit. They're actually buying a stake in a Canadian mining company uh called Trilogy Metals and they basically are mainly a copper and zinc mine, but they also have some rare earth sin amongst that. Uh but they're their mine is actually based in Alaska. But nevertheless, the the Department of Defense who who are basically driving all these deals because they're trying to secure security and sort of mineral security if you write for the longer term for America. um are as done under this other deal. Remember the last few weeks we've touched on many of them and there is speculation there are many many more to come. So that should be good for underlying valuations of mining companies which I think we'll be talking about later on when we come to review what we might do with a portfolio or may not do with a portfolio this week. Obviously there's also um an interesting fact for those youngans amongst us and those who who follow sport. Um, but Christian Ronaldo has become the first ever football billionaire this week because he signed a new contract with the Saudis. Um, and he is now apparently his net worth has risen to $1.4 billion according to Bloomberg Intelligence. Um, and that's on the back of him being a major star in EA Sports, which obviously got taken private uh last week for $55 billion, one of the largest ever leverage buyouts in history. >> It's in the game. >> It's in the game. Another big move this week of a very big company was um again uh AMD or Advanced Micro Devices and basically they are have agreed a deal to supply open AI who own Chat GBT um with hundreds of thousands of AI chips going forward. Um and it added 40% 4% to the AMD share price over the past few days. Uh it's pretty incredible. All these circular deals that are going on, companies into funding each other, um is perhaps, you know, a bit of a warning sign that it's getting a bit silly out there. Uh but nevertheless, it also could be a sign that people realize that the the speed that they have to move to keep up with the AI revolution. >> And sorry, Mark, do you mind just going into the the what you called circular there? >> What do you mean by circular deals? So in this case basically um Open AAI have basically agreed to buy up to 10% of AMD shares and they've got warrants as well. And so effectively they're going to give AMD money for their 10% state. In return uh Open AI are going to guarantee to buy computer chips off of AMD AI computer chips off of AMD. So effectively open AAI are funding a AMD to to build the chips and then they're buying them anyway >> which is exactly what we saw within video already. >> But I think it also is indicative of the fact that there's this there's a real shortage of highowered computing chips that are sort of to be used in AI applications. Um and that's why people are trying to secure supply in the long term. Um, and it will be at the expense of companies in the UK, Europe, and even places like China. And the Americans are all over this trying to make sure they can get as many chips as they want or they anticipate they want over the next 5 to 10 years. It's a huge market. >> The the thing that worries me there obviously is is OpenAI now has $1 trillion of commitments that it's made and it doesn't have cash. So, you know, it's lossmaking. It doesn't have the cash. So it is going to rely on >> rich. What? You're such a wet blanket on this stuff, mate. Aren't you? You're such a wet blanket. Just believe. >> Next bill story, please. >> Do you realize during the internet bubble, the the companies found it hardest when they actually started making money. The ones that went up the most were the ones that didn't make any money. Of course, because when you start making money, you can put a proper valuation on the company rather than theorize about it. And that, you know, maybe we're seeing a bit of that now. Now you know chat GBT um which is part of Open AI already has subscriber revenue and that will increase and increase as it grows. And as you as you remember a few weeks ago Google they were being investigated for having a monopoly in search engines and that was thrown out because there is this growth in other search engines like chat GPT like um Perplexity like many of the others that are coming. I I think I mean just been um just joining you a little bit in the grizzly camp just for a second. >> Come over. It is interesting how everyone is becoming so incestuous by by linking their companies up together. I read a very interesting article on that this week which basically said there's nothing inherently wrong with that. I mean the Japanese did it for many years with their um uh with with each having cross shareholdings and companies and that's how Japanese industry did work before it all went wrong. And the problem is what what happens when it goes wrong is everybody goes wrong together. So if they go up together, they will all go down together because they have all these relationships with each other which they're locked into. So it's fine while the music's playing as we've said before. We just got to be very careful. watch for those signs, but no signs at the moment. But it's just we've seen this film before. >> It applies to lots of different areas, not just AI. I mean, this week I know Chris and I were talking about it before the program about a company called First Brands, which is a p major private company in the US um that is unqued, so you can't invest in it or thankfully we couldn't invest in it. uh but they're an auto part auto car part maker uh manufacturing distributor and they've gone into what's called chapter 11 or bankruptcy in the US uh with debts of around 11.6 billion and the fallout from that is some of the banks who have lent them money are going to have to take losses on that. So Union Bank of Switzerland the UBS are going to have a hit of about $500 million uh and Jeff which is a large investment bank in America is going to take a hit of over $700 million. So you know when companies go bust there is there are many other people who get affected not just the companies that are supplying into them because it's also can have a big ne negative impact for them too. Elsewhere, um Trump has is infuriated a few people because he's talking maybe remember the government shutdown has led to a lot of workers up to 750 800,000 workers who working for government in non-essential areas to be furled and we remember furlow from um from the co days but he's saying that the furled workers in America may not be entitled to get back pay which would be completely a break with tradition now that could have quite a negative impact in the short term depending on how long the shutdown goes on for on the real economy of the US. So, we got to keep an eye on that very closely. But it's something he's thrown up in the air, but maybe just typical Trump where he's throwing out there for effect. >> They are the deal >> indeed. Now, talking of other things, last thing in America really is that the Federal Reserves had their minutes from their monthly meeting in September out last night. There was nothing new in there apart from is maybe a little bit more hawkish than someone like as a dove, I believe. hish, which means that people who expect want interest rates to go up and anti-inflation and doves like me who want interest rates go down because I'm not worried about inflation. I'm more worried about growth. And so that the inflation the the the hawks, the people who thought inflation needs to be a bit more controlled, sort of had probably more of a say than we thought they had after the press conference last week when they cut or a couple of weeks ago when they cut interest rates. Again, something to keep an eye on. and the US bond market moved a tiny little bit and reduced the chances of a cut uh another 25 basis points or a quarter of a percent at their next meeting on the 29th of October uh down to 92% probability from 99. So it's neither here nor there but at the edge there was something one thing I want to talk about is very quickly is because of the shutdown there is a lack of data going that analysts and investors can get a hold of we have the start of the US and and the corporate reporting season start again next week with the big banks JP Morgan Goldman Sachs Mel Lynch um and city group etc they will start next week and then a couple of weeks after that come the mag beginning of the magnificent seven with people like Google and Amazon and so on. And we have to be very cognizant and watch those carefully because that may be the only hints we get of how the underlying economy is really going in the US and the world. >> As if the Max 7's attached to the real economy. Come on, please. >> Anything this week from you CJ? >> Just one thing really, but I just wanted to just come in on what Mark said there um where he he gave us hawks a bad name because he said us hawks need looking for rate rises. We're not looking for rate rises. We're just not looking for them to be cut as aggressively as the mark's discounting. So, so to me, so to me, I think it's I think is best to point out to our listeners, hawks are people who think that, you know, rates won't come down as quickly or may go up. The doves will be people who think they should be cutting rates now and driving it down more. So, I just wanted to put that little bit of differentiation in there before we get a bad name. Number one. Secondly, uh the one thing that I thought was interesting and this, you know, this is just me putting three and three together making 27 is um an announcement in the UK um by Astroenica where they made a very interesting change last week. They decided that in this battle about where they want to get listed and you know this this big battle between New York and London that they were going to keep their joint listing. Well, well, so what? But what they were going to do is they were going to go for a full listing in America on the New York Stock Exchange from their what they have now, which are these American depository receipts. Mark talked about those a couple of weeks ago, but they're a way of trading um international companies on US exchanges which isn't going for a full listing. By going for a full listing, the shares have to be traded in New York on the deposit with depository trust company acting as custodians >> and therefore they're essentially switching things. Yeah. from the shares in London to being shares in New York. And in the UK, you'll be trading depository interests. Now, people listening to this, if they haven't fallen asleep already, are starting to wonder why not. The reason this is important is because trading in depository interests or trading in New York does not attract stamp duty. And the calculation is that this change will cost the exjecker over200 million pounds. Now if we think they've done that, what's to stop BP, Shell, other big companies which currently have ADRs in America doing the same thing, making it cheaper for everybody to buy their shares. And so what you could have here is a way of getting round stamp duty by companies which will cost the exjeer in the UK. I think the the the amount that that stage raises is somewhere between three and four billion pounds. This will be really interesting to see what Rachel Reeves does to this. Whether she a says you can't do that and changes the law, which is clearly possible, you know, put some slap some tax on depository interests, or she does the sensible thing and stands up and says, I'm going to get rid of stamp duty, which immediately would be a good Philip in the arm for the UK stock market. Something to watch. Not something I think will necessarily happen, but just very interesting what's going on here. >> Right now, I think, Mr. Chairman, you gave us some homework last week after the quarterly review. What should we be looking at? Last week, um, we reviewed the entire portfolio in our quarterly review. Um, but as I said last week with all asset allocation meetings, people in the city love to drone on for hours and hours and in the end, we get to a situation where we didn't actually reach consensus and a conclusion. So that's what I wanted us to do today. Um and boy do we need to given how our weekly portfolio has performed. Now >> for those let's put that up on the screen now for those who are who are looking at the YouTube rather than who are listening and you'll see it's been an absolutely fantastic weekly performance um up 2.6% 6% on the week and our total return of the portfolio since inception over 8% 8.2%. You can't keep a good man down. The Vanet crypto and blockchain innovators is now up 50% since we bought it. I'll repeat that. It's now up 50% since we bought it. >> Eight weeks ago. >> And that's eight weeks ago. >> Good job. We didn't sell a couple of weeks. >> And um that has been our best performance and cash is clearly our worst performance. even that ees out the uh return that cash gets. So, it's been a fantastic week and I think combined with the quarterly review will lead us to have to think about what we want to do. Before we get to what we want to do, I did say that this week we were to have a deep dive into the emerging market space and I arranged for two um experts to come and talk about Hold on, hold on, I've got my phones ringing. Hello. Hello. Hello. Oh, oh, right. Okay. Okay. I couldn't find any experts. So, actually, I've now got Rich and Spicy who are going to talk to us about the emerging market asset class. Now, of course, clearly I'm joking. They're very well um respected in this area. They both know a lot about it, a lot more than I do. So, I'm going to take on Rich's role as as coordinating the pod just for this segment uh to talk about emerging markets. >> Good luck. >> Thank you. Um I'll just have the cards as well, Mark. Maybe you might like to start and guys just give everybody a flavor for um what do we talk about when we talk about emerging markets? What are the markets that are there? What are the drivers and and what's the attraction of this as an asset class? >> Sure. Well, it's a huge sort of area to cover including lots of different countries if you imagine all the countries outside of the main European, US and UK stock markets and some of the Asian markets like Japan and some of the other markets around the world. Basically to keep this simple, we're going to focus in on the what is the iShares Core Msei Emerging Markets uh investable market index ETF. It sounds a very long concluded sort of name for a for an ETF, but it's one that we can have data on and it's also one you could put in your pension or your SIP or your IS uh and it's the biggest in the world. It happens to be valued at about 22 billion pounds worth of assets in there. Can I ask just there just let's have a little bit more detail on on that ju just in terms of what that stands for. iShares is the firm who are issuing the ETF. What was the next thing? MCI >> core MCI emerging markets investable market index. >> So the MSCI is an is an index provider just like you've got the S&P, you've got the Footsie. MSCI do indices for around the world. This is an ETF that's linked to the index. And the last part of it was the investable market index ETF. By saying investable, we're taking out Russia because Russia is deemed by most investors, including ourselves, to be uninvestable because whereas histo I'm trying to show you the way to go, Rick. >> Well, I mean, Russia was part of the index until 2022. Obviously when they invaded Ukraine it was taken out and they were approximately about 3% of the overall index. And if they were there today in the same index if they're included today that would have fallen to about 1 and a half to 2% because their stock market the Russian stock market has been falling very very heavily and the currency has been very weak as well. But the biggest companies now within the the index I'm going to go through the top five now is China is about a quarter of it 25% or so. Taiwan um is about 19%, India is just over 15%, South Korea is about 11 and then Brazil is about 5%. Those are the top five waitings of by country in this in this ETF. Those top five account for 75% of the whole ETF. Now, if you looked at sector-wise, no surprise that information technology, technology, anything to do with AI has been doing very well. And that's about a quarter of the the entire fund if people took it in each sector from each country. So about 25% is information technology. Financial services like banks, insurance companies are about 21%. Consumer discretionary um and is about 13%, communication services about 10 uh and then industrial is about 8. So they're they're big chunks of the market in those sort of sectors. Uh and that gives you a very brief and quick overview of where we are. Can I ask a question there? If I was to look at the geographical split of those sectors, would it look like the overall index i.e. mostly China then was it India and then and then down or or is there any air pace in particular who's really good at it? The reason that Taiwan and Korea appear in the those those top top names is because Taiwan has Taiwan Semiconductor is the biggest company uh in Taiwan. It also is the biggest company within this ETF. It's about 7% of the whole ETF. >> All right. So that's what you've one of the things one needs to understand when looking at this is that 7% of the whole ETF is probably your exposure to Taiwan which is Taiwan semiconductor. >> Exactly. And the second biggest holding is Samsung electronics. Many of you have Samsung products around your house, maybe the television, whatever it happens to be, um, sort of fridges, etc. Uh, and they are, you know, the leading manufacturer of smartphones. They make memory chips and mostly consumer electronics, which is why people learn, but they're Korea's biggest company. And in this ETF, they're about 5.3% of the ETF. So those two companies alone make up the top two holdings about 12% of total nearly 12 13% of the of the the ETF itself and basically those make up the big the big waitings from those countries Taiwan and Korea. Um the next biggest is then 10 cent which is a Chinese uh technological conglomerate. Uh and they're about 4% of the fund. Uh then Alibaba another big uh Chinese company bit like Amazon in China. Alibaba's just under 4% as well. So when I look at this just as in with a sort of um non-expert view, I I need to think that the IT areas are going to do pretty well if I want to buy into this sort of trust because the way it's set up, the biggest companies in these emerging markets are those AI companies, are those information technology companies. And so if we looked at it just contrasting again to the UK, let's say, where we've got very few of these, this is a a mirror image of exactly the opposite sort of thing of what we've got in in the UK. That's what you're saying to people. >> Absolutely. Like I say, about a quarter of the ETF is in information technologies. Now, if you compared it to the S&P 500, about 35% of the S&P 500, so about a third of that is actually it sort of the magnificent seveners they become to known. So, it's got less than it has in the S&P, less of a skew, but it's still very significant nevertheless. >> But if if if I'm correct here, and I I think I am, emerging markets overall, their performance has been pretty poor over the last five years, let's say, very good performance this year, but before then pretty poor performance. Does that mean their their IT companies are very cheap actually compared to how they trade in the US? So therefore if they were trading you on sames multiples it's this could do very well. >> I think that takes us to a kind of wider description of of what emerging markets. So so I was head of emerging markets at creditswiss in their equities in MIA division. So that's Europe, Middle East and Africa. So I had the the great fortune of looking after South Africa which we'll talk a little bit about today. Turkey and Russia. Now you can tell there a lot more instability right depending on how their rulers or sorry presidents are and we have seen Russia Russia always traded cheap. It was it was so tempting to buy the Russian banks because relative to US banks you were getting them at four times earnings right in fact you could buy the whole Russian index at five times earnings. That is relative to the S&P at 20. Yeah. So yes is the answer to your question. They do always trade cheaper and the Chinese internet stocks, you know, have been tempting. In fact, they've had a great performance this year. But it's the question people got burnt by Russia, right? All the big funds that were invested lost a huge amount of money. And the question is, do they want to make the same mistake by going into China? Now, front page of the Sunday Times this week was all about China and the the spy ring in the UK. If China were to invade Taiwan at some point, as President Xi has alluded to, then you'd get your fingers burnt again. And this is just the the the the constant um risk by investing in emerging markets. We're buying something that's cheap and it's volatile, but knowing those little intricacies is the important part. What we're saying is there's some great value companies here, but there's a degree of political risk surrounding most of the regions and it's how you discount that in the way the market discounts that in is to keep things trading quite cheap to say, well, yeah, it could go wrong. China could go and invade Taiwan in which case you got a problem with 7% of your portfolio perhaps. And so therefore the cheapness is the political risk premium being built in. >> Okay. All right. >> So if you looked at the PE ratio, the price earnings ratio that we've talked about before in earlier episodes of the emerging markets index, it's only about 16 times for this year. Now that compares with the S&P 500 at the moment at about 23 24 times depending on if you want to be a bear or bit more optimistic like me. But either way there's a big discount and that goes back to what Rich is just saying and you explaining that there is this political risk. Uh and there is also some mistrust about some of the numbers of the way companies report in some of these businesses as well. People don't western investors don't necessarily believe that some of the numbers are there. So they automatically discount it. They want to believe it but don't quite sort of wholeheartly back it up. Now this index has already outperformed substantially this year. You know done very well this year about 27% this year but it's still a long way before it below its alltime high historically which is back in January 2018. So there's been a discount for there. My instinct is that if we're right and some of the money starts to flow out some of the biggest names in the US etc. and money goes elsewhere in the world and the global economies start picking up, then this index should start to move back to its all-time high, which gives us plenty of headroom if we were to invest in it today. We're not buying it right at the very top. We're buying it some at a quite big discount to where it has traded historically. >> You say 2018 was the peak. >> Yeah. >> What are the couple of reasons why it it's it's done so badly in that first period. Now it's doing better. It's coming back up. But what are the reasons for everybody as to why that is the case? A lot of that's going to be to do with China, I'm presuming. >> Um, and the fact that people can't predict what's going to happen there next. And we've gone from a lovein by most people in China, take David Cameron and George Osborne who were trying to do many many deals with with China to now everybody hates them. So presumably that's something in there. >> Definitely. >> But what anything what else has been in there? >> Uh, China's the big one. Obviously Russia was part of the index at that time. Yes, >> that was a big chunk of it. That's disappeared completely, taken out the index. That's gone completely. >> Then you've had some countries like South America, Brazil was particularly a lot bigger back then. Um, and places like Mexico were were bigger parts of it and they're now very small portions of part and you got that's been compensated for now by countries like Saudi Arabia's come because Saudi Arabia is home to the biggest company in the entire world. But if you were to do it a full full market capitalization, it's called Saudi Aramco. It's their oil company and backs all their oil companies. It's huge. It's absolutely enormous. Um, and it's the only uh it's the only really big sort of non US company in the sort of top 10 in the world. If you were to look at the biggest sort of companies from emerging markets in the world, Saudi Ramco, which is their oil company of Saudi Arabia, is the seventh biggest company by market capitalization in the world. >> Uh, and that's behind Nvidia, Microsoft, Apple, Amazon, and Meta. And so, it's huge, right? It's about$1.5 trillion worth of market capitalization. However, there's only about 2% of the company is floated on the stock exchange. If you were to take the full valuation of Saudi Aramco, it would probably be worth $75 trillion. >> Wow. >> So, you can see that it would far outstrip the size of any big company. Nvidia is currently about $4.5 trillion, the biggest company in the world. >> A long way to go. These Americans long way to go. >> Exactly. Now, interestingly, Taiwan semiconductor, which obviously we already touched on, Taiwan, is valued at about $1.2 trillion and sits around number nine or number 10 in the the biggest companies in the world. And it, you know, it is it's a great company, but it does have this inherent political risk that if one day China were to turn around and invade Taiwan, that could half quite literally half, which is interesting. One of the reasons and that the company as a whole are investing in America, manufacturing in America and other parts of the world to reduce their dependence on being in Taiwan should that ever come to pass. Grow your portfolio with IG. Invest £50 with IG and get a free share bundle worth between4 and £200. Make your first investment into an ISA, general investment account, or SIM by the 31st of October and benefit from commissionfree investing as well as 4% variable interest on your cash. Other fees may apply, terms and conditions found in the show notes or on ig.com/uk. Kickstart your investing journey with IG today. One of the other main things and since 2018 um as well, you got to take currencies into consideration when you come into emerging markets because of course you're dealing with emerging currencies. Now to give you a a feel of how important that is, the Turkish lera has depreciated by 80% in the last 5 years. right now. That's great if you are in dollars and you're earning in dollars and then taking the profits back to Turkey. But if you're raising debt as the Turkish government in dollars, then your debt is getting a whole lot more expensive in the local currency terms. So when the the dollar has been strong as it has done since 2018 until a few months ago till the start of this year they got whacked by CO because you know CO was a big struggle in a lot of these countries then they got whacked by interest rates going up and then they got whacked by the strong dollar. So there's been that huge underperformance and only now things are starting to turn because of the the weak >> dollar and the other things and they could drop a little bit and they can draw. All right. Okay. Understood. >> If I was to think about that political risk you were talking about. Let's go a little bit further just into that. How do you regard China in terms of investability? What sort of risk do you think is there? And I suppose my final question on that would be can you buy the emerging markets without China? You know, buy an index without China. What what what are the thoughts on that guys? Let's cover the pros for China. It's the second biggest population of the world. Um they are currently trying to stimulate their economy because they're trying to offset deflation, which is falling prices rather than rising prices, which is inflation. Uh they are the world's second biggest economy. You can't get away from it. Um, and you know, they've got 1.4 billion people, huge middle classes expanding, lots of very good companies, albeit rated very lowly. And one of the reasons that they are rated lower than um other countries is because the government have they have what's called the state-owned enterprises. So the state own between 40 and 50% of many of their biggest companies. They have an interest in there which means that they're not as efficient perhaps as a pure pure externally 100% owned by shareholders company like they would be in America or even in the UK. So they have slightly different sort of objectives as companies. Sometimes it's to pay back government debt rather than give the money back to shareholders and or pay down company debt. So government debt rather than invest in the business for the future. And so these this interest of this big state-owned enterprise shareholding that between 40 and 50% of all Chinese companies is actually very significant and will keep a lower rating on it. That doesn't mean that you know the valuation they might be trading on about 12 times price earnings ratio. Doesn't stop them going to 15 or 16 times but they're probably never going to go to 23 or 24 times like we have in America at the moment. just to to push you there on CJ's question. Would you want to be in invested in emerging markets exchina or emerging markets with China? >> Personally with China and that's because I think they're in this in this stimulusive mode at the moment. They really want to try and get their economy going and I'm believer that economic growth across the world will begin to pick up. It'll be led by America with the you know one big beautiful bill and all the rest that that we've talked about many times but in the next 12 18 months I believe the US growth will pick up that will lead to better growth elsewhere in the world and China as one of the big manufacturing hubs of the world and they will be major beneficiary of global growth picking up and we haven't had that at the moment. So you know as an investor you've got to anticipate what's coming because the current share price has already discounted what's happened in the past. You've got to look forward. You're not It's not going to be perfect. Your timing may be a bit off, but you've got to be positioned for maybe some of these things as you see the world. And I see it as a an improving global economic outlook. China will be very much a beneficiary of that because otherwise >> but you have that one risk on the horizon that China does something with Taiwan and then essentially becomes an outcast and then there's a whole chunk of the portfolio there. So the Chinese have been the most sensible strategic mindset of any group of people over the last 20 years and you've seen with their initiatives to get exposure to parts of Africa and Asia that they they're thinking a long way ahead and with their rare earths as well. So I think they think they can take on America with their economic might. I don't think they need the military side. So I suppose if you're wanting to put some of this in your portfolio, a you need to understand that there's a big risk there. So B, you want to make sure it's not too much of your portfolio, I suppose, would be what you're saying, Mark. Am I putting words in your mouth or is that what you're >> think? Yeah. No, I wouldn't, you know, mortgage the house and put it all in emerging markets. No doubt about that. You know, if instinctively you want it to be, I don't know, five or 10% of your portfolio probably at most. Um, and that's because, as you say, there are these inherent risks. But remember, China is only about a quarter of the whole emerging markets index. >> Yeah. Well, so we we've got 5% in India at the moment. That is our emerging markets exposure. Take us through India. >> So we we talked about India a bit last week. The big reason for being in India is that there is a huge demographic change going on in India. They are the biggest population of the world now. They've overtake they overtook the Chinese population back in 2023. their population growth is expected to keep growing until about 2050. So for the next sort of 25 years or so whereas China's population is now beginning to decline and within that growth of population there is a growing middle and upper middle class of people uh who earn you know a very decent amount of money for the country they live in by our standards is very poor. Uh and but basically incomes are basically going that's for people earning between £4,000 a year up to about £42,000 a year. That's what the middle class is. Now, a lot of that middle class are young, under 35. They're really keen to invest in stock markets and save. They say they save at about twice the rate that we do in the UK. And they basically want to keep investing their own stock market. So 75 to 80% of all the shares owned in India in the Indian stock markets are owned by domestic Indian people. >> Wow. >> And that's huge. Now that middle class and the upper middle class is currently 29% combined of the the population at the moment, but by 2050 in 25 years time that's going to be over 50%. So it's going to be doubling effectively. And these are all increasingly wealthy people who want to invest in the stock market and they're happy to do it. They're they're very price insensitive. They don't really care about the valuation. And there's an old saying in stock markets, valuations don't matter until they matter. And that means that no one really cares about the valuation until things go wrong. And then they look back and goes, "Oh, look, it's too high." Then I always told you it was too high. That will be a rich quote, I'm sure. >> I'm going to get hacked with it printed on. >> So no, I mean, look, as a as a as a nation, they are they're savers. They love their stock market and they're going to do it. It's expensive. But the biggest companies in India are not very big tech companies. So the biggest company is is a bank actually. uh and that's about 14% of the Indian index and it would be a big chunk of of the ETF. Um and there's there's three banks I can see in the in the top sort of five holdings and then there are more consumers and oil companies and a very different makeup of an index. So it gives you some diversification in the Indian index to things that we're the big tri growth drivers seeing in other areas and probably that's one of the reasons the Indian stock market has performed not as well as some of the others in this year so far this year but nevertheless that's also been because Trump's tariffs and remember he slapped effectively a 50% tariff on India because they were buying oil off Russia and he basically added another 25% to an already 25% tariff. Now one day that will be you know we know Trump he'll probably turn around at some point and say right I'm changing that back to 25%. The Indian stock market will absolutely roof it at the time. So I think as as a counter it's a nice sort of sleeper to have in your in your Yeah. Right. Just to take us very quickly through South Africa then. So South Africa I I lived down there. I was so excited about the prospects back in uh 201213 and of course huge hu huge mining community down there. So there's a lot of exposure in the index to gold miners that makes up 10% of the South African top 40. However, if we were going to buy the ETF, we're not really getting South African exposure. We're getting companies that are listed elsewhere in the world are also listed in South Africa. So to take you through um four of the top five companies, you've got Anheiser Binbe because they bought South African breweries. You got BHP, you've got Rishmon, which is of course the the fancy watches, and then you've got British American Tobacco. So, you know, you've got a European listed company, a Swiss listed company, and then two Footsie listed companies. So, South Africa's got great prospects because if you look at the interest rates, they're 7% a year, and the currency has only lost 5% in the last 5 years. Compare that with Turkey, which has lost 80% of its currency, then you've got a nice rand appreciation story. Um, however, investing in the equities doesn't really make sense because you're just investing in stuff from other countries. I mean, the good thing is only 3.3% of this ETF that we're looking at and actually, you know, the biggest holding in this particular ETF is Naspers, which if you remember is their global internet and sort technology company. They invest around the world. That's a third of that whole that whole sort of um 3.3% >> and they owe 10 cent. So that >> so I mean you're not exposed sort of double counting by having some of those mining companies which we would have you know in the Black Rockck World Mining Fund. >> So in conclusion I think what we're saying is got some very attractively priced companies. You need to be able to take the political risk. You need to be able to get be comfortable back in your mind and one of the main factors driving what your return will be will be a weaker dollar as much as anything else. >> Absolutely. >> Am I right? Is that my right cheat sheet for when I think about things later? >> Yeah. Spot on. >> Thank you very much. Okay. So, let's move on then. I'm going to hand back the role of coordinating the uh meeting to Rich. But let's carry on with where we were with regard to the quarterly review and what we need to do on the portfolio. What we said last week was that um asset classes um are are all looking pretty good. Um and we could have bought bought bought bought and bought more things last week, but I uh think that we've got to be realistic. we've got to think about um where prices are and some of the risks that are around. And I I want to draw attention to two things before I hand over to my two colleagues here. We talked in one of the earlier pods that you want to look for turning points in markets. And you know those turning points of markets are often things you see after the event, but if you can see them at the time, it's it's just helpful to put you on watch. And and we talked about that time in 2007 where uh Chuck Prince who was CEO of City Bank said when the music stops in terms of liquidity things will be complicated but as long as the music is playing you've got to get up and dance and we are still dancing and within days that was the top of the credit market and starting the um the wrong the long road to the global financial crisis. So when I look at things, there are two things I saw this week which make me go h I wonder. >> Oh hello, tell me more. >> The first one was the headline in the FT uh on Tuesday morning. Now why do I mention headlines? There's an old saying in the markets which says that when it something appears on the front page of a newspaper or maybe the economist magazine or something like that, it's in the price. It's in the market. The last person in it's ready to to turn tail and move in the other direction. What did we see on the front page? The FT goldsplated FOMO powers bullion recordbreaking rally. So front page of the FT feels it's fine to talk about gold having gone from what 3,000 at the start of the year to now 4,000 and going strongly. It suddenly gets put on the front page and referred to as a FOMO rally which for everybody wanting to understand is fear of missing out. But the very fact the Financial Times, they shouldn't have words like FOMO on the front page. >> And and so that concerned me when I saw that, I thought, you know, is this a sign? Maybe, maybe not, but something to think about. Number one. The second one Mark talked about earlier, which I thought was really interesting this week. And that's this first brands in the USA company selling car parts in Ohio in the US. Um, it's gone bankrupt. And Jeffrey's credit funds reported exposure of $715 million. And UBS, as Mark talked about earlier, has is saying they're going to lose over $500 million. Now, this is private equity and you know, you you'll need to get ready with your yellow and red cards because I'm not careful. I'll stop ranting and you'll need to stop me. But I have a big problem with private equity and private debt. And we'll do a episode at some stage in the future to talk about these things in more detail. Essentially the institutions within the investing framework that's pension funds, insurance companies have been searching for yield and searching for yield and in an environment where interest rates have gone from five to zero and there's been lots of QE done. They've been searching for yield and along come these clever people who say I tell you what we'll do. We'll put together a private debt and a private or a private equity fund and we can offer you massive returns of 10 11 12% a year. And what's happened is you've formed these huge number of private equity, private debt, hedge fund type concerns who are basically doing the banking industry's job for them. The banks aren't lending money to these people anymore. It's being lent by these hedge funds. And of course, what hedge funds do is they leverage things and they take big exposures. And there's no regulation on this at all. None whatsoever. >> What are the names of some of those funds? Apollo, is that one? >> People within the industry. Blackstone, Apollo are two famous ones. Uh but there are a number of firms and we can you know in a later pod we can list them all. Clearly they won't be on my birthday card list or Christmas present list. To me this is something people need to be really aware of. They've we've seen in investment industry going into into these illquid investments to try to pick up yield which when the world's fine are absolutely great and not a problem. Not having to go them in that sense. But people have forgotten the role that falling interest rates have played in making those returns so good in the past. Interest rates have now risen and now these things are suffering. And so the thing that I think about with this is is this the sign that some of this slowdown that Mark's been talking about in the US is starting to come through in some of these traditional industries and all the debt problems are not with the banks. they're with these private debt groups and so we got to be very careful that we're watching this. So here are two signs to me of excess that's happened and maybe maybe we're at we're getting closer to a turning point. So this gives me concerns as to where we are in the cycle. And you know there's an old here's another saying which we're going to bastardize indeed with where we are in the world today. Are these canaries in the gold mine? Very good. >> My my conclusion is I see signs of excess. I see worries. I am a worried person. I naturally worry because I'm a bond guy as as Spice would say. I don't think we're at the top yet. I still think there's more to go. There's more exponential moves in some markets. We've seen some exponential moves already, but there are some still to go. So, I want to add, but I want to add in things that I think are looking still cheap. And to me, after our conversation last week, I want to add to the world mining trust. I like that. I like the outlook for the metals. I like what you guys were saying last week. And I like what you're saying about emerging markets as well. So I I would add exposure there. What I would do though is looking how well the Vanet crypto and blockchain innovators ETF has done, having sat on my hands for the last two or three weeks, I would now reduce our holding back down to 2 and a half%. So that's where I am from what we heard last week, what we've heard this week. Rich, where where are you? >> Well, looking at the portfolio as a whole, right? That number at the top, let's not ignore that. We are up 8.2% in 8 weeks. That doesn't happen, right? We've all been in funds and that is astronomical. Far beyond what we could ever have dreamed of. Now, our target, let's not forget, is 10% for the whole year. And we're two months through the year and we've got 8%. We could put the whole amount in cash now and uninvested cash with IG pays 4%. >> Be a very boring podcast. So wouldn't >> it doesn't mean it's the wrong decision. >> No. No. >> And that would mean we hit the target. Now just reminds me of a story at Breven actually in 2007. We had an Australian PM who shall remain nameless >> and he made a fortune on a stock called Lionus. Now Lionus an Australian rare earth miner. >> All right. >> I think we've might have heard of some of those recently as well. It was up 117% and he had a big part of his portfolio in it along with others as well. He made >> a huge amount by the August of 2007. shut up shop and went on holiday for 3 months because he knew he was going to get paid very well. He did get paid very well, but he didn't have a job when he came back for 2008 because it did not go down well with the bosses. So, yes, I agree. Going 100% into cash, even though that would leave us up 11% for the year, is not an option. However, what do you do in that position, Mr. Chairman? Do you increase the target for the year? Well, it's a very very interesting subject and you know um we were um thinking about how we might tackle this subject in one of the future podcast because I I think to be honest it's worth more worthy than a quick 5minute conversation here. I think it's you know how do you react when you are ahead of where you think you should be equally how do you react when you're be behind where you should be if we were down minus 8. >> Yeah. >> You know what would you do? Would you triple the positions and go over borrow to try to get there or not? Those are it's a really good debate. I have a lot of sympathy with with what you're saying. Our number one task is to get to 10. And so we that needs to be in our mind. And so, you know, we will tackle that subject going forward. I'm going to park that for today because I I still I don't think we're at the top. I think there's more to go for, but I am getting nervous. I don't think anybody ever can call the top like that though. So, it doesn't I don't mind you saying I don't think we're at the top, but it's irrelevant to me because I don't think anybody can actually call the top, especially the bull to my left. >> So, if you're sitting on something that's up 51% and you're almost at your target for the year, then I'm sorry. I would sell all of that and I would go into the Footsie, which is far more defensive. So, my homework is that I want to get my hard hat on and I want to come out of the um expensive volatile assets here cuz I think we've got a correction coming. I think that we've got uh a 6% move lower and um I'm uncomfortable. Now the things I'm comfortable in are gold uh copper the Footsie India Russell 2000 still and the World Mining Trust which I agree with you I'm very happy to increase in but that VANC blockchain innovators for me would be gone and I would be cutting the S&P 500 exposure in half like we did with the NASDAQ before. So, while I wouldn't be moving 100% to cash, I'd be moving the expensive S&P 500 into Footsie and I'd be happy to um to go with you into the the World Mining Trust and a little bit into emerging as well because we've said it's a little bit more defensive, but I can feel the glaring eyes from the bull. Okay, look, I'm going to start with something you might like to hear is that if I am concerned about markets and the US markets in particular at the moment, it is that we are seeing this proliferation in circular or self-funding intercomp deals. Um that that to me is a potential concern. Now that comes about for two reasons historically. Companies take over another company with their equities with the the value of their company when they think the value of their company is very high. So they will use shares to buy another company rather than cash and that sometime is a warning sign that the people with in the stock market the people within those companies managing it thinking their share their own share prices have got too high. Now in this case a lot of it is to do with the AI revolution that's going on. It may be this time and I'm not saying it's different this time. I'm not saying it's different this time. I believe that these companies, particularly the American ones, have worked out this is a massive race to get into the AI revolution and they will get first mover advantage and that's why they're willing to spend billions, hundreds of billions of dollars on it. So that's why I think they are prepared to do these circular self-funding intercomp deals. I get it. But that is my biggest concern. I can see it from both sides. I can see management saying our shares are expensive. Let's use that as currency. And I can see it from the fact that people want to race to get AI done. But I think when you look at our portfolio as a whole, we have what's called a barbell already in our portfolio. So that on one side, we remember earlier episode we talked about antifragile and fragile assets. Fragile assets are the things that move up and down with economic growth and are high more volatile by their very nature. And equities are those. If you added up all of the fragile assets in our portfolio uh and you would take the S&P, NASDAQ, Russell 2000, Nicki at Japan's market, DAX the German market, the Footsie 100 and India, those are all equities. If you added all those up, that's 55% of the portfolio. But on the other side, what we've described as antifragile supposedly do better when times get tough and when stock markets wobble. We've got gold, we've got copper, we've got crypto, we've got black rockck world mining, we've got cash and we've got short guilts. And together they are 45% of the portfolio. So we are balanced already between this fragile and antifragile. That's what you call a barbell. There's nothing really in between. But you have got guns guns on both sides. Now you know you could say that black rockck world mining should be an equity. Therefore, you would maybe make that 60% into into fragile assets and for just 40% in um in antifragile or defensive. So, I'm I'm quite happy with the overall balance of the portfolio as things stand at the moment. I'm a natural bull. I still think we've got further to go, but I do think that I have sympathy with outside of the US then we should be able to make more money by a sort of revaluation of some of these other areas. Emerging markets we've talked about today. I would very happily start there with a 5% position. I'd very happily do that. And the Black Rockck World Mining Trust, which we also own, I would add to that. And part of the reason is if you believe that these deals that the US government are doing, buying stakes in other mining companies, they're not just doing it because they think those those equities are cheap. Maybe they are. Maybe that's the US government saying actually mining equities are cheap >> cuz we know we're going to keep doing it. >> Yeah. But there are there are rumors about that there they may be doing hundreds more of these sort of deals. Now if lots of these little mining companies get takes stakes taken them by US government, I bet you the US government isn't going to be the only one out there doing it. I bet you the Chinese will be thinking about it. I bet you other countries will start thinking about it. And so that should lift the underlying valuation of mining companies relative to other companies. And a lot of the mining companies sit on a discount to the underlying commodity prices that actually they're selling by dayto-day. So they're sitting on a discount already. That discount may close. I'm very happy to put another 5% in black rock mining. >> So you see this is the big difficulty of being a asset allocation committee and what normally happens in the city. Exactly what's going on here is what happens around many many many tables and meeting rooms in the city where people have got strong views in each direction and you know there's no right or wrong answer here. Um only time will tell you what's right or wrong and of course we can't see the future but we can only act on our experience. So if I look at those things together Rich has said sell 5% S&P 500 in Footsie. Well I'm not really interested in that. And then let me tell you why I'm in why why I'm not interested in that. Because if the S&P goes down, the footsie is going down. Everything has taught us in the in in the world. Everything has always taught us. It may not do it over three months, but over the first few days, the first week, first two weeks, Footsie slapped just as hard as the S&P 500. So I don't regard that as a particularly defensive mood. I I regard that as still taking exposure in a softer way. But every time I've ever tried that as a fund manager, it's always been a disaster because what happens is the US guys all come in and buy the S&P, you know, bottom fish in the S&P when they think it's right. They don't come and buy footsie and no one in the but UK ever buys footsie. We know anyway. So it doesn't help. So I I'm going to dismiss that one for the moment because I think I I I don't argue against buying Footsie. If I was bullish of markets, I might buy Footsie because it's better value. That's just a bit if the catalyst is AI related then foot seat bulletproof. >> Yeah. But if it's not AI related then I'm not particularly sure that the markets are going to come back very much anyway. So the VANC I think is an issue for us. There's no doubt about it because it's a large part of our portfolio. It's gone up far more than we ever thought it would. And I'm suggesting we sell it. Not all of it. I'm suggesting we keep a bit. I think Mark's suggesting we keep a bit. Yeah, I'd be happy to sell half of it because I think what I said before it's when we were talking about selling someone it was 30% up. It's now 50% up. >> All right, smart ass. >> I sat on my I I sat on my No, no, no. I'm the chairman. I sat on my hands. I didn't do anything. So don't give me that. >> We'll take the VANC blockchain down to 2 and a half% waiting. >> Yep. And then so then it comes down to the other two. And I think we should add 5% to world mining. I think we all like five the the world mining. And I think we should build a 5% position in the emerging markets and um sit there with those. So as chairman, the decision I'm going to make given the conversation, unless someone's going to throw something at me for for doing it is reducing VANC, take it down to two and a half, putting five extra in the world mining, putting five extra in the emerging market, and take the net seven and a half that's going in out of cash. >> Would you describe that as increasing risk? the VANAX very risky. I would say net net you are increasing risk um but you're not increasing risk by how much the numbers would suggest because as you have correctly stated the VANC is a much more volatile instrument and you're actually moving exposure from the really hot part of the market really hot parts of the market to areas that aren't quite so hot at the moment. They're not cold areas of the market. They're pretty warm. Simmering. Simmering nice. Thank you very much. And so you'll be increasing risk, but by not as much as you think. Um I I do accept though that we are trying to fine-tune things here, but I think we are skillful enough to be able to uh at least show some of our experience through and and think about a better time to sell than now more of our risk assets >> when it's lower in a couple of weeks. Well, if we have to sell when it's lower, then as we've talked about before, one of the great skills of a fund manager is to not remember too much about what they've said or where they've done it because it's more important what goes on in the future than what's actually happened in the past. So, um I I don't like selling things that are off the top or off the boil, but if we have to, that's what we will do. So, I promise you at the start, difficult decisions and difficult conversations had to be made, and there they were. Uh thank you Spice for that deep dive into China and India and uh thank you chairman for trying to take on my role. If uh you like what you've been listening to then please give us a subscribe, give us a like and tell all your family and friends about it. Uh we very much look forward to seeing what markets bring us next week. Gentlemen, if the viewers want to get some questions into us, then where should they write to? The arts of investing at ig.com. >> We'll see you next week. [Music]
Investing in Emerging Markets, & The Canary in the Gold Mine
Summary
Transcript
and you'll see it's been an absolutely fantastic weekly performance. The Vanet crypto and blockchain innovators is now up 50% since we bought it. I'll repeat that. It's now up 50% since we bought it 8 weeks ago. >> I think what I said before when we were talking about selling someone it was 30% up. It's now 50% up. >> Smart. Just to to push you there. Would you want to be invested in emerging markets exchina or emerging markets with China? >> So when I look at things, there are two things I saw this week which make me go I wonder. >> Oh hello. Tell me more. Your capital is at risk. The value of your shares, ETFs and ETCs can fall as well as rise which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to episode 14 of The Art of Investing brought to you by IG, the global investing platform. Now, difficult decisions to be made this week. Potential for the bulls and the bears to butt heads, but as always, we will start with the spice market update. Thank you, Rich. Well, we're into the second week of a US government shutdown and markets are completely shrugging off. New alltime highs pretty much everywhere, including the DAX. Woohoo. >> That was last night. That's great. Even Bitcoin eaked out a new alltime high. Yes. So all sorts of other assets are now beginning to catch up with the leaders that have been the US and the Footsie again hitting new time high. >> Sorry, but you're saying the Footsie was a leader as well though. >> Yeah, this time >> albe it briefly. >> New alltime high. >> It was earlier this week, not now. Uh anyway, one of the other big news that stories this week was in Japan and one of the reasons the Nikai hit a new alltime high. As we expected and we sort of speculated, uh Japan have had their first woman prime minister. Uh San Taganichi um is coming to power. Um remember said she was a bit of a Thatcherite uh which a lot of people will sort of make their their skin crawl on hearing that. But that's positive for stock markets. Um, and she's pro business, pro- stimulus, uh, and supports increased public spending and easier monetary policy. And those are all things that help equity markets. And so the nick eye hit a new alltime high this week. In fact, it's up about four or 5%. I think wasn't great for the yen, was it? >> No. And that's but that still ironically helps the underlying stock market because a lot of Japanese companies are exporters. And when your currency falls, when you're manufacturing in that country, you better basically get a competitive advantage against a country where they have higher currency rates. Um, and that's ironically one of the reasons UK exporters have benefited over a long period of time because the pound has tended to fall over a very long period of time. So there's swings and roundabouts >> and and and it's important also to think about that in terms of what Trump's Trump is up to as well. you know, Trump wants to ease off the dollar if he can, not too obviously, but just drive it down a little bit, which helps then the export performance of the US. So, there's a lot of people who wouldn't mind their currencies coming off a little bit. Um, and it's just a question of of how quickly they do and how controlled that is. >> I think that was called race to the bottom about 10 years ago, wasn't it? >> Well, interesting. Actually, the dollar has had one of its best weeks in a very long time. It's up over 1% this week against a basket of other currencies like the euro, the Japanese yen and the pound sterling. Uh and part of the reason for that is obviously the yen has been weaker. And the other reason is because of the political turmoil in France which has continued this week. We saw Sebastian Lacron um basically have to resign um after he couldn't get a budget together after just get this 26 to 27 days I think he was in power. >> I think that beats Liz Trust doesn't it? >> It does. Liz Trust made 49 days. So the French political turmoil is even worse than ours. And uh we'll see what they go. But there there is some speculation there may be uh you know there may be a need for a snap election in France. But that combined with the weaker yen and obviously a forthcoming budget in the UK has led to a combination of those currencies being weaker, the dollar being stronger. Also in America, uh Trump and his team have been busy at work buying yet more stakes in yet more companies. This time they're chancing their arm a bit. They're actually buying a stake in a Canadian mining company uh called Trilogy Metals and they basically are mainly a copper and zinc mine, but they also have some rare earth sin amongst that. Uh but they're their mine is actually based in Alaska. But nevertheless, the the Department of Defense who who are basically driving all these deals because they're trying to secure security and sort of mineral security if you write for the longer term for America. um are as done under this other deal. Remember the last few weeks we've touched on many of them and there is speculation there are many many more to come. So that should be good for underlying valuations of mining companies which I think we'll be talking about later on when we come to review what we might do with a portfolio or may not do with a portfolio this week. Obviously there's also um an interesting fact for those youngans amongst us and those who who follow sport. Um, but Christian Ronaldo has become the first ever football billionaire this week because he signed a new contract with the Saudis. Um, and he is now apparently his net worth has risen to $1.4 billion according to Bloomberg Intelligence. Um, and that's on the back of him being a major star in EA Sports, which obviously got taken private uh last week for $55 billion, one of the largest ever leverage buyouts in history. >> It's in the game. >> It's in the game. Another big move this week of a very big company was um again uh AMD or Advanced Micro Devices and basically they are have agreed a deal to supply open AI who own Chat GBT um with hundreds of thousands of AI chips going forward. Um and it added 40% 4% to the AMD share price over the past few days. Uh it's pretty incredible. All these circular deals that are going on, companies into funding each other, um is perhaps, you know, a bit of a warning sign that it's getting a bit silly out there. Uh but nevertheless, it also could be a sign that people realize that the the speed that they have to move to keep up with the AI revolution. >> And sorry, Mark, do you mind just going into the the what you called circular there? >> What do you mean by circular deals? So in this case basically um Open AAI have basically agreed to buy up to 10% of AMD shares and they've got warrants as well. And so effectively they're going to give AMD money for their 10% state. In return uh Open AI are going to guarantee to buy computer chips off of AMD AI computer chips off of AMD. So effectively open AAI are funding a AMD to to build the chips and then they're buying them anyway >> which is exactly what we saw within video already. >> But I think it also is indicative of the fact that there's this there's a real shortage of highowered computing chips that are sort of to be used in AI applications. Um and that's why people are trying to secure supply in the long term. Um, and it will be at the expense of companies in the UK, Europe, and even places like China. And the Americans are all over this trying to make sure they can get as many chips as they want or they anticipate they want over the next 5 to 10 years. It's a huge market. >> The the thing that worries me there obviously is is OpenAI now has $1 trillion of commitments that it's made and it doesn't have cash. So, you know, it's lossmaking. It doesn't have the cash. So it is going to rely on >> rich. What? You're such a wet blanket on this stuff, mate. Aren't you? You're such a wet blanket. Just believe. >> Next bill story, please. >> Do you realize during the internet bubble, the the companies found it hardest when they actually started making money. The ones that went up the most were the ones that didn't make any money. Of course, because when you start making money, you can put a proper valuation on the company rather than theorize about it. And that, you know, maybe we're seeing a bit of that now. Now you know chat GBT um which is part of Open AI already has subscriber revenue and that will increase and increase as it grows. And as you as you remember a few weeks ago Google they were being investigated for having a monopoly in search engines and that was thrown out because there is this growth in other search engines like chat GPT like um Perplexity like many of the others that are coming. I I think I mean just been um just joining you a little bit in the grizzly camp just for a second. >> Come over. It is interesting how everyone is becoming so incestuous by by linking their companies up together. I read a very interesting article on that this week which basically said there's nothing inherently wrong with that. I mean the Japanese did it for many years with their um uh with with each having cross shareholdings and companies and that's how Japanese industry did work before it all went wrong. And the problem is what what happens when it goes wrong is everybody goes wrong together. So if they go up together, they will all go down together because they have all these relationships with each other which they're locked into. So it's fine while the music's playing as we've said before. We just got to be very careful. watch for those signs, but no signs at the moment. But it's just we've seen this film before. >> It applies to lots of different areas, not just AI. I mean, this week I know Chris and I were talking about it before the program about a company called First Brands, which is a p major private company in the US um that is unqued, so you can't invest in it or thankfully we couldn't invest in it. uh but they're an auto part auto car part maker uh manufacturing distributor and they've gone into what's called chapter 11 or bankruptcy in the US uh with debts of around 11.6 billion and the fallout from that is some of the banks who have lent them money are going to have to take losses on that. So Union Bank of Switzerland the UBS are going to have a hit of about $500 million uh and Jeff which is a large investment bank in America is going to take a hit of over $700 million. So you know when companies go bust there is there are many other people who get affected not just the companies that are supplying into them because it's also can have a big ne negative impact for them too. Elsewhere, um Trump has is infuriated a few people because he's talking maybe remember the government shutdown has led to a lot of workers up to 750 800,000 workers who working for government in non-essential areas to be furled and we remember furlow from um from the co days but he's saying that the furled workers in America may not be entitled to get back pay which would be completely a break with tradition now that could have quite a negative impact in the short term depending on how long the shutdown goes on for on the real economy of the US. So, we got to keep an eye on that very closely. But it's something he's thrown up in the air, but maybe just typical Trump where he's throwing out there for effect. >> They are the deal >> indeed. Now, talking of other things, last thing in America really is that the Federal Reserves had their minutes from their monthly meeting in September out last night. There was nothing new in there apart from is maybe a little bit more hawkish than someone like as a dove, I believe. hish, which means that people who expect want interest rates to go up and anti-inflation and doves like me who want interest rates go down because I'm not worried about inflation. I'm more worried about growth. And so that the inflation the the the hawks, the people who thought inflation needs to be a bit more controlled, sort of had probably more of a say than we thought they had after the press conference last week when they cut or a couple of weeks ago when they cut interest rates. Again, something to keep an eye on. and the US bond market moved a tiny little bit and reduced the chances of a cut uh another 25 basis points or a quarter of a percent at their next meeting on the 29th of October uh down to 92% probability from 99. So it's neither here nor there but at the edge there was something one thing I want to talk about is very quickly is because of the shutdown there is a lack of data going that analysts and investors can get a hold of we have the start of the US and and the corporate reporting season start again next week with the big banks JP Morgan Goldman Sachs Mel Lynch um and city group etc they will start next week and then a couple of weeks after that come the mag beginning of the magnificent seven with people like Google and Amazon and so on. And we have to be very cognizant and watch those carefully because that may be the only hints we get of how the underlying economy is really going in the US and the world. >> As if the Max 7's attached to the real economy. Come on, please. >> Anything this week from you CJ? >> Just one thing really, but I just wanted to just come in on what Mark said there um where he he gave us hawks a bad name because he said us hawks need looking for rate rises. We're not looking for rate rises. We're just not looking for them to be cut as aggressively as the mark's discounting. So, so to me, so to me, I think it's I think is best to point out to our listeners, hawks are people who think that, you know, rates won't come down as quickly or may go up. The doves will be people who think they should be cutting rates now and driving it down more. So, I just wanted to put that little bit of differentiation in there before we get a bad name. Number one. Secondly, uh the one thing that I thought was interesting and this, you know, this is just me putting three and three together making 27 is um an announcement in the UK um by Astroenica where they made a very interesting change last week. They decided that in this battle about where they want to get listed and you know this this big battle between New York and London that they were going to keep their joint listing. Well, well, so what? But what they were going to do is they were going to go for a full listing in America on the New York Stock Exchange from their what they have now, which are these American depository receipts. Mark talked about those a couple of weeks ago, but they're a way of trading um international companies on US exchanges which isn't going for a full listing. By going for a full listing, the shares have to be traded in New York on the deposit with depository trust company acting as custodians >> and therefore they're essentially switching things. Yeah. from the shares in London to being shares in New York. And in the UK, you'll be trading depository interests. Now, people listening to this, if they haven't fallen asleep already, are starting to wonder why not. The reason this is important is because trading in depository interests or trading in New York does not attract stamp duty. And the calculation is that this change will cost the exjecker over200 million pounds. Now if we think they've done that, what's to stop BP, Shell, other big companies which currently have ADRs in America doing the same thing, making it cheaper for everybody to buy their shares. And so what you could have here is a way of getting round stamp duty by companies which will cost the exjeer in the UK. I think the the the amount that that stage raises is somewhere between three and four billion pounds. This will be really interesting to see what Rachel Reeves does to this. Whether she a says you can't do that and changes the law, which is clearly possible, you know, put some slap some tax on depository interests, or she does the sensible thing and stands up and says, I'm going to get rid of stamp duty, which immediately would be a good Philip in the arm for the UK stock market. Something to watch. Not something I think will necessarily happen, but just very interesting what's going on here. >> Right now, I think, Mr. Chairman, you gave us some homework last week after the quarterly review. What should we be looking at? Last week, um, we reviewed the entire portfolio in our quarterly review. Um, but as I said last week with all asset allocation meetings, people in the city love to drone on for hours and hours and in the end, we get to a situation where we didn't actually reach consensus and a conclusion. So that's what I wanted us to do today. Um and boy do we need to given how our weekly portfolio has performed. Now >> for those let's put that up on the screen now for those who are who are looking at the YouTube rather than who are listening and you'll see it's been an absolutely fantastic weekly performance um up 2.6% 6% on the week and our total return of the portfolio since inception over 8% 8.2%. You can't keep a good man down. The Vanet crypto and blockchain innovators is now up 50% since we bought it. I'll repeat that. It's now up 50% since we bought it. >> Eight weeks ago. >> And that's eight weeks ago. >> Good job. We didn't sell a couple of weeks. >> And um that has been our best performance and cash is clearly our worst performance. even that ees out the uh return that cash gets. So, it's been a fantastic week and I think combined with the quarterly review will lead us to have to think about what we want to do. Before we get to what we want to do, I did say that this week we were to have a deep dive into the emerging market space and I arranged for two um experts to come and talk about Hold on, hold on, I've got my phones ringing. Hello. Hello. Hello. Oh, oh, right. Okay. Okay. I couldn't find any experts. So, actually, I've now got Rich and Spicy who are going to talk to us about the emerging market asset class. Now, of course, clearly I'm joking. They're very well um respected in this area. They both know a lot about it, a lot more than I do. So, I'm going to take on Rich's role as as coordinating the pod just for this segment uh to talk about emerging markets. >> Good luck. >> Thank you. Um I'll just have the cards as well, Mark. Maybe you might like to start and guys just give everybody a flavor for um what do we talk about when we talk about emerging markets? What are the markets that are there? What are the drivers and and what's the attraction of this as an asset class? >> Sure. Well, it's a huge sort of area to cover including lots of different countries if you imagine all the countries outside of the main European, US and UK stock markets and some of the Asian markets like Japan and some of the other markets around the world. Basically to keep this simple, we're going to focus in on the what is the iShares Core Msei Emerging Markets uh investable market index ETF. It sounds a very long concluded sort of name for a for an ETF, but it's one that we can have data on and it's also one you could put in your pension or your SIP or your IS uh and it's the biggest in the world. It happens to be valued at about 22 billion pounds worth of assets in there. Can I ask just there just let's have a little bit more detail on on that ju just in terms of what that stands for. iShares is the firm who are issuing the ETF. What was the next thing? MCI >> core MCI emerging markets investable market index. >> So the MSCI is an is an index provider just like you've got the S&P, you've got the Footsie. MSCI do indices for around the world. This is an ETF that's linked to the index. And the last part of it was the investable market index ETF. By saying investable, we're taking out Russia because Russia is deemed by most investors, including ourselves, to be uninvestable because whereas histo I'm trying to show you the way to go, Rick. >> Well, I mean, Russia was part of the index until 2022. Obviously when they invaded Ukraine it was taken out and they were approximately about 3% of the overall index. And if they were there today in the same index if they're included today that would have fallen to about 1 and a half to 2% because their stock market the Russian stock market has been falling very very heavily and the currency has been very weak as well. But the biggest companies now within the the index I'm going to go through the top five now is China is about a quarter of it 25% or so. Taiwan um is about 19%, India is just over 15%, South Korea is about 11 and then Brazil is about 5%. Those are the top five waitings of by country in this in this ETF. Those top five account for 75% of the whole ETF. Now, if you looked at sector-wise, no surprise that information technology, technology, anything to do with AI has been doing very well. And that's about a quarter of the the entire fund if people took it in each sector from each country. So about 25% is information technology. Financial services like banks, insurance companies are about 21%. Consumer discretionary um and is about 13%, communication services about 10 uh and then industrial is about 8. So they're they're big chunks of the market in those sort of sectors. Uh and that gives you a very brief and quick overview of where we are. Can I ask a question there? If I was to look at the geographical split of those sectors, would it look like the overall index i.e. mostly China then was it India and then and then down or or is there any air pace in particular who's really good at it? The reason that Taiwan and Korea appear in the those those top top names is because Taiwan has Taiwan Semiconductor is the biggest company uh in Taiwan. It also is the biggest company within this ETF. It's about 7% of the whole ETF. >> All right. So that's what you've one of the things one needs to understand when looking at this is that 7% of the whole ETF is probably your exposure to Taiwan which is Taiwan semiconductor. >> Exactly. And the second biggest holding is Samsung electronics. Many of you have Samsung products around your house, maybe the television, whatever it happens to be, um, sort of fridges, etc. Uh, and they are, you know, the leading manufacturer of smartphones. They make memory chips and mostly consumer electronics, which is why people learn, but they're Korea's biggest company. And in this ETF, they're about 5.3% of the ETF. So those two companies alone make up the top two holdings about 12% of total nearly 12 13% of the of the the ETF itself and basically those make up the big the big waitings from those countries Taiwan and Korea. Um the next biggest is then 10 cent which is a Chinese uh technological conglomerate. Uh and they're about 4% of the fund. Uh then Alibaba another big uh Chinese company bit like Amazon in China. Alibaba's just under 4% as well. So when I look at this just as in with a sort of um non-expert view, I I need to think that the IT areas are going to do pretty well if I want to buy into this sort of trust because the way it's set up, the biggest companies in these emerging markets are those AI companies, are those information technology companies. And so if we looked at it just contrasting again to the UK, let's say, where we've got very few of these, this is a a mirror image of exactly the opposite sort of thing of what we've got in in the UK. That's what you're saying to people. >> Absolutely. Like I say, about a quarter of the ETF is in information technologies. Now, if you compared it to the S&P 500, about 35% of the S&P 500, so about a third of that is actually it sort of the magnificent seveners they become to known. So, it's got less than it has in the S&P, less of a skew, but it's still very significant nevertheless. >> But if if if I'm correct here, and I I think I am, emerging markets overall, their performance has been pretty poor over the last five years, let's say, very good performance this year, but before then pretty poor performance. Does that mean their their IT companies are very cheap actually compared to how they trade in the US? So therefore if they were trading you on sames multiples it's this could do very well. >> I think that takes us to a kind of wider description of of what emerging markets. So so I was head of emerging markets at creditswiss in their equities in MIA division. So that's Europe, Middle East and Africa. So I had the the great fortune of looking after South Africa which we'll talk a little bit about today. Turkey and Russia. Now you can tell there a lot more instability right depending on how their rulers or sorry presidents are and we have seen Russia Russia always traded cheap. It was it was so tempting to buy the Russian banks because relative to US banks you were getting them at four times earnings right in fact you could buy the whole Russian index at five times earnings. That is relative to the S&P at 20. Yeah. So yes is the answer to your question. They do always trade cheaper and the Chinese internet stocks, you know, have been tempting. In fact, they've had a great performance this year. But it's the question people got burnt by Russia, right? All the big funds that were invested lost a huge amount of money. And the question is, do they want to make the same mistake by going into China? Now, front page of the Sunday Times this week was all about China and the the spy ring in the UK. If China were to invade Taiwan at some point, as President Xi has alluded to, then you'd get your fingers burnt again. And this is just the the the the constant um risk by investing in emerging markets. We're buying something that's cheap and it's volatile, but knowing those little intricacies is the important part. What we're saying is there's some great value companies here, but there's a degree of political risk surrounding most of the regions and it's how you discount that in the way the market discounts that in is to keep things trading quite cheap to say, well, yeah, it could go wrong. China could go and invade Taiwan in which case you got a problem with 7% of your portfolio perhaps. And so therefore the cheapness is the political risk premium being built in. >> Okay. All right. >> So if you looked at the PE ratio, the price earnings ratio that we've talked about before in earlier episodes of the emerging markets index, it's only about 16 times for this year. Now that compares with the S&P 500 at the moment at about 23 24 times depending on if you want to be a bear or bit more optimistic like me. But either way there's a big discount and that goes back to what Rich is just saying and you explaining that there is this political risk. Uh and there is also some mistrust about some of the numbers of the way companies report in some of these businesses as well. People don't western investors don't necessarily believe that some of the numbers are there. So they automatically discount it. They want to believe it but don't quite sort of wholeheartly back it up. Now this index has already outperformed substantially this year. You know done very well this year about 27% this year but it's still a long way before it below its alltime high historically which is back in January 2018. So there's been a discount for there. My instinct is that if we're right and some of the money starts to flow out some of the biggest names in the US etc. and money goes elsewhere in the world and the global economies start picking up, then this index should start to move back to its all-time high, which gives us plenty of headroom if we were to invest in it today. We're not buying it right at the very top. We're buying it some at a quite big discount to where it has traded historically. >> You say 2018 was the peak. >> Yeah. >> What are the couple of reasons why it it's it's done so badly in that first period. Now it's doing better. It's coming back up. But what are the reasons for everybody as to why that is the case? A lot of that's going to be to do with China, I'm presuming. >> Um, and the fact that people can't predict what's going to happen there next. And we've gone from a lovein by most people in China, take David Cameron and George Osborne who were trying to do many many deals with with China to now everybody hates them. So presumably that's something in there. >> Definitely. >> But what anything what else has been in there? >> Uh, China's the big one. Obviously Russia was part of the index at that time. Yes, >> that was a big chunk of it. That's disappeared completely, taken out the index. That's gone completely. >> Then you've had some countries like South America, Brazil was particularly a lot bigger back then. Um, and places like Mexico were were bigger parts of it and they're now very small portions of part and you got that's been compensated for now by countries like Saudi Arabia's come because Saudi Arabia is home to the biggest company in the entire world. But if you were to do it a full full market capitalization, it's called Saudi Aramco. It's their oil company and backs all their oil companies. It's huge. It's absolutely enormous. Um, and it's the only uh it's the only really big sort of non US company in the sort of top 10 in the world. If you were to look at the biggest sort of companies from emerging markets in the world, Saudi Ramco, which is their oil company of Saudi Arabia, is the seventh biggest company by market capitalization in the world. >> Uh, and that's behind Nvidia, Microsoft, Apple, Amazon, and Meta. And so, it's huge, right? It's about$1.5 trillion worth of market capitalization. However, there's only about 2% of the company is floated on the stock exchange. If you were to take the full valuation of Saudi Aramco, it would probably be worth $75 trillion. >> Wow. >> So, you can see that it would far outstrip the size of any big company. Nvidia is currently about $4.5 trillion, the biggest company in the world. >> A long way to go. These Americans long way to go. >> Exactly. Now, interestingly, Taiwan semiconductor, which obviously we already touched on, Taiwan, is valued at about $1.2 trillion and sits around number nine or number 10 in the the biggest companies in the world. And it, you know, it is it's a great company, but it does have this inherent political risk that if one day China were to turn around and invade Taiwan, that could half quite literally half, which is interesting. One of the reasons and that the company as a whole are investing in America, manufacturing in America and other parts of the world to reduce their dependence on being in Taiwan should that ever come to pass. Grow your portfolio with IG. Invest £50 with IG and get a free share bundle worth between4 and £200. Make your first investment into an ISA, general investment account, or SIM by the 31st of October and benefit from commissionfree investing as well as 4% variable interest on your cash. Other fees may apply, terms and conditions found in the show notes or on ig.com/uk. Kickstart your investing journey with IG today. One of the other main things and since 2018 um as well, you got to take currencies into consideration when you come into emerging markets because of course you're dealing with emerging currencies. Now to give you a a feel of how important that is, the Turkish lera has depreciated by 80% in the last 5 years. right now. That's great if you are in dollars and you're earning in dollars and then taking the profits back to Turkey. But if you're raising debt as the Turkish government in dollars, then your debt is getting a whole lot more expensive in the local currency terms. So when the the dollar has been strong as it has done since 2018 until a few months ago till the start of this year they got whacked by CO because you know CO was a big struggle in a lot of these countries then they got whacked by interest rates going up and then they got whacked by the strong dollar. So there's been that huge underperformance and only now things are starting to turn because of the the weak >> dollar and the other things and they could drop a little bit and they can draw. All right. Okay. Understood. >> If I was to think about that political risk you were talking about. Let's go a little bit further just into that. How do you regard China in terms of investability? What sort of risk do you think is there? And I suppose my final question on that would be can you buy the emerging markets without China? You know, buy an index without China. What what what are the thoughts on that guys? Let's cover the pros for China. It's the second biggest population of the world. Um they are currently trying to stimulate their economy because they're trying to offset deflation, which is falling prices rather than rising prices, which is inflation. Uh they are the world's second biggest economy. You can't get away from it. Um, and you know, they've got 1.4 billion people, huge middle classes expanding, lots of very good companies, albeit rated very lowly. And one of the reasons that they are rated lower than um other countries is because the government have they have what's called the state-owned enterprises. So the state own between 40 and 50% of many of their biggest companies. They have an interest in there which means that they're not as efficient perhaps as a pure pure externally 100% owned by shareholders company like they would be in America or even in the UK. So they have slightly different sort of objectives as companies. Sometimes it's to pay back government debt rather than give the money back to shareholders and or pay down company debt. So government debt rather than invest in the business for the future. And so these this interest of this big state-owned enterprise shareholding that between 40 and 50% of all Chinese companies is actually very significant and will keep a lower rating on it. That doesn't mean that you know the valuation they might be trading on about 12 times price earnings ratio. Doesn't stop them going to 15 or 16 times but they're probably never going to go to 23 or 24 times like we have in America at the moment. just to to push you there on CJ's question. Would you want to be in invested in emerging markets exchina or emerging markets with China? >> Personally with China and that's because I think they're in this in this stimulusive mode at the moment. They really want to try and get their economy going and I'm believer that economic growth across the world will begin to pick up. It'll be led by America with the you know one big beautiful bill and all the rest that that we've talked about many times but in the next 12 18 months I believe the US growth will pick up that will lead to better growth elsewhere in the world and China as one of the big manufacturing hubs of the world and they will be major beneficiary of global growth picking up and we haven't had that at the moment. So you know as an investor you've got to anticipate what's coming because the current share price has already discounted what's happened in the past. You've got to look forward. You're not It's not going to be perfect. Your timing may be a bit off, but you've got to be positioned for maybe some of these things as you see the world. And I see it as a an improving global economic outlook. China will be very much a beneficiary of that because otherwise >> but you have that one risk on the horizon that China does something with Taiwan and then essentially becomes an outcast and then there's a whole chunk of the portfolio there. So the Chinese have been the most sensible strategic mindset of any group of people over the last 20 years and you've seen with their initiatives to get exposure to parts of Africa and Asia that they they're thinking a long way ahead and with their rare earths as well. So I think they think they can take on America with their economic might. I don't think they need the military side. So I suppose if you're wanting to put some of this in your portfolio, a you need to understand that there's a big risk there. So B, you want to make sure it's not too much of your portfolio, I suppose, would be what you're saying, Mark. Am I putting words in your mouth or is that what you're >> think? Yeah. No, I wouldn't, you know, mortgage the house and put it all in emerging markets. No doubt about that. You know, if instinctively you want it to be, I don't know, five or 10% of your portfolio probably at most. Um, and that's because, as you say, there are these inherent risks. But remember, China is only about a quarter of the whole emerging markets index. >> Yeah. Well, so we we've got 5% in India at the moment. That is our emerging markets exposure. Take us through India. >> So we we talked about India a bit last week. The big reason for being in India is that there is a huge demographic change going on in India. They are the biggest population of the world now. They've overtake they overtook the Chinese population back in 2023. their population growth is expected to keep growing until about 2050. So for the next sort of 25 years or so whereas China's population is now beginning to decline and within that growth of population there is a growing middle and upper middle class of people uh who earn you know a very decent amount of money for the country they live in by our standards is very poor. Uh and but basically incomes are basically going that's for people earning between £4,000 a year up to about £42,000 a year. That's what the middle class is. Now, a lot of that middle class are young, under 35. They're really keen to invest in stock markets and save. They say they save at about twice the rate that we do in the UK. And they basically want to keep investing their own stock market. So 75 to 80% of all the shares owned in India in the Indian stock markets are owned by domestic Indian people. >> Wow. >> And that's huge. Now that middle class and the upper middle class is currently 29% combined of the the population at the moment, but by 2050 in 25 years time that's going to be over 50%. So it's going to be doubling effectively. And these are all increasingly wealthy people who want to invest in the stock market and they're happy to do it. They're they're very price insensitive. They don't really care about the valuation. And there's an old saying in stock markets, valuations don't matter until they matter. And that means that no one really cares about the valuation until things go wrong. And then they look back and goes, "Oh, look, it's too high." Then I always told you it was too high. That will be a rich quote, I'm sure. >> I'm going to get hacked with it printed on. >> So no, I mean, look, as a as a as a nation, they are they're savers. They love their stock market and they're going to do it. It's expensive. But the biggest companies in India are not very big tech companies. So the biggest company is is a bank actually. uh and that's about 14% of the Indian index and it would be a big chunk of of the ETF. Um and there's there's three banks I can see in the in the top sort of five holdings and then there are more consumers and oil companies and a very different makeup of an index. So it gives you some diversification in the Indian index to things that we're the big tri growth drivers seeing in other areas and probably that's one of the reasons the Indian stock market has performed not as well as some of the others in this year so far this year but nevertheless that's also been because Trump's tariffs and remember he slapped effectively a 50% tariff on India because they were buying oil off Russia and he basically added another 25% to an already 25% tariff. Now one day that will be you know we know Trump he'll probably turn around at some point and say right I'm changing that back to 25%. The Indian stock market will absolutely roof it at the time. So I think as as a counter it's a nice sort of sleeper to have in your in your Yeah. Right. Just to take us very quickly through South Africa then. So South Africa I I lived down there. I was so excited about the prospects back in uh 201213 and of course huge hu huge mining community down there. So there's a lot of exposure in the index to gold miners that makes up 10% of the South African top 40. However, if we were going to buy the ETF, we're not really getting South African exposure. We're getting companies that are listed elsewhere in the world are also listed in South Africa. So to take you through um four of the top five companies, you've got Anheiser Binbe because they bought South African breweries. You got BHP, you've got Rishmon, which is of course the the fancy watches, and then you've got British American Tobacco. So, you know, you've got a European listed company, a Swiss listed company, and then two Footsie listed companies. So, South Africa's got great prospects because if you look at the interest rates, they're 7% a year, and the currency has only lost 5% in the last 5 years. Compare that with Turkey, which has lost 80% of its currency, then you've got a nice rand appreciation story. Um, however, investing in the equities doesn't really make sense because you're just investing in stuff from other countries. I mean, the good thing is only 3.3% of this ETF that we're looking at and actually, you know, the biggest holding in this particular ETF is Naspers, which if you remember is their global internet and sort technology company. They invest around the world. That's a third of that whole that whole sort of um 3.3% >> and they owe 10 cent. So that >> so I mean you're not exposed sort of double counting by having some of those mining companies which we would have you know in the Black Rockck World Mining Fund. >> So in conclusion I think what we're saying is got some very attractively priced companies. You need to be able to take the political risk. You need to be able to get be comfortable back in your mind and one of the main factors driving what your return will be will be a weaker dollar as much as anything else. >> Absolutely. >> Am I right? Is that my right cheat sheet for when I think about things later? >> Yeah. Spot on. >> Thank you very much. Okay. So, let's move on then. I'm going to hand back the role of coordinating the uh meeting to Rich. But let's carry on with where we were with regard to the quarterly review and what we need to do on the portfolio. What we said last week was that um asset classes um are are all looking pretty good. Um and we could have bought bought bought bought and bought more things last week, but I uh think that we've got to be realistic. we've got to think about um where prices are and some of the risks that are around. And I I want to draw attention to two things before I hand over to my two colleagues here. We talked in one of the earlier pods that you want to look for turning points in markets. And you know those turning points of markets are often things you see after the event, but if you can see them at the time, it's it's just helpful to put you on watch. And and we talked about that time in 2007 where uh Chuck Prince who was CEO of City Bank said when the music stops in terms of liquidity things will be complicated but as long as the music is playing you've got to get up and dance and we are still dancing and within days that was the top of the credit market and starting the um the wrong the long road to the global financial crisis. So when I look at things, there are two things I saw this week which make me go h I wonder. >> Oh hello, tell me more. >> The first one was the headline in the FT uh on Tuesday morning. Now why do I mention headlines? There's an old saying in the markets which says that when it something appears on the front page of a newspaper or maybe the economist magazine or something like that, it's in the price. It's in the market. The last person in it's ready to to turn tail and move in the other direction. What did we see on the front page? The FT goldsplated FOMO powers bullion recordbreaking rally. So front page of the FT feels it's fine to talk about gold having gone from what 3,000 at the start of the year to now 4,000 and going strongly. It suddenly gets put on the front page and referred to as a FOMO rally which for everybody wanting to understand is fear of missing out. But the very fact the Financial Times, they shouldn't have words like FOMO on the front page. >> And and so that concerned me when I saw that, I thought, you know, is this a sign? Maybe, maybe not, but something to think about. Number one. The second one Mark talked about earlier, which I thought was really interesting this week. And that's this first brands in the USA company selling car parts in Ohio in the US. Um, it's gone bankrupt. And Jeffrey's credit funds reported exposure of $715 million. And UBS, as Mark talked about earlier, has is saying they're going to lose over $500 million. Now, this is private equity and you know, you you'll need to get ready with your yellow and red cards because I'm not careful. I'll stop ranting and you'll need to stop me. But I have a big problem with private equity and private debt. And we'll do a episode at some stage in the future to talk about these things in more detail. Essentially the institutions within the investing framework that's pension funds, insurance companies have been searching for yield and searching for yield and in an environment where interest rates have gone from five to zero and there's been lots of QE done. They've been searching for yield and along come these clever people who say I tell you what we'll do. We'll put together a private debt and a private or a private equity fund and we can offer you massive returns of 10 11 12% a year. And what's happened is you've formed these huge number of private equity, private debt, hedge fund type concerns who are basically doing the banking industry's job for them. The banks aren't lending money to these people anymore. It's being lent by these hedge funds. And of course, what hedge funds do is they leverage things and they take big exposures. And there's no regulation on this at all. None whatsoever. >> What are the names of some of those funds? Apollo, is that one? >> People within the industry. Blackstone, Apollo are two famous ones. Uh but there are a number of firms and we can you know in a later pod we can list them all. Clearly they won't be on my birthday card list or Christmas present list. To me this is something people need to be really aware of. They've we've seen in investment industry going into into these illquid investments to try to pick up yield which when the world's fine are absolutely great and not a problem. Not having to go them in that sense. But people have forgotten the role that falling interest rates have played in making those returns so good in the past. Interest rates have now risen and now these things are suffering. And so the thing that I think about with this is is this the sign that some of this slowdown that Mark's been talking about in the US is starting to come through in some of these traditional industries and all the debt problems are not with the banks. they're with these private debt groups and so we got to be very careful that we're watching this. So here are two signs to me of excess that's happened and maybe maybe we're at we're getting closer to a turning point. So this gives me concerns as to where we are in the cycle. And you know there's an old here's another saying which we're going to bastardize indeed with where we are in the world today. Are these canaries in the gold mine? Very good. >> My my conclusion is I see signs of excess. I see worries. I am a worried person. I naturally worry because I'm a bond guy as as Spice would say. I don't think we're at the top yet. I still think there's more to go. There's more exponential moves in some markets. We've seen some exponential moves already, but there are some still to go. So, I want to add, but I want to add in things that I think are looking still cheap. And to me, after our conversation last week, I want to add to the world mining trust. I like that. I like the outlook for the metals. I like what you guys were saying last week. And I like what you're saying about emerging markets as well. So I I would add exposure there. What I would do though is looking how well the Vanet crypto and blockchain innovators ETF has done, having sat on my hands for the last two or three weeks, I would now reduce our holding back down to 2 and a half%. So that's where I am from what we heard last week, what we've heard this week. Rich, where where are you? >> Well, looking at the portfolio as a whole, right? That number at the top, let's not ignore that. We are up 8.2% in 8 weeks. That doesn't happen, right? We've all been in funds and that is astronomical. Far beyond what we could ever have dreamed of. Now, our target, let's not forget, is 10% for the whole year. And we're two months through the year and we've got 8%. We could put the whole amount in cash now and uninvested cash with IG pays 4%. >> Be a very boring podcast. So wouldn't >> it doesn't mean it's the wrong decision. >> No. No. >> And that would mean we hit the target. Now just reminds me of a story at Breven actually in 2007. We had an Australian PM who shall remain nameless >> and he made a fortune on a stock called Lionus. Now Lionus an Australian rare earth miner. >> All right. >> I think we've might have heard of some of those recently as well. It was up 117% and he had a big part of his portfolio in it along with others as well. He made >> a huge amount by the August of 2007. shut up shop and went on holiday for 3 months because he knew he was going to get paid very well. He did get paid very well, but he didn't have a job when he came back for 2008 because it did not go down well with the bosses. So, yes, I agree. Going 100% into cash, even though that would leave us up 11% for the year, is not an option. However, what do you do in that position, Mr. Chairman? Do you increase the target for the year? Well, it's a very very interesting subject and you know um we were um thinking about how we might tackle this subject in one of the future podcast because I I think to be honest it's worth more worthy than a quick 5minute conversation here. I think it's you know how do you react when you are ahead of where you think you should be equally how do you react when you're be behind where you should be if we were down minus 8. >> Yeah. >> You know what would you do? Would you triple the positions and go over borrow to try to get there or not? Those are it's a really good debate. I have a lot of sympathy with with what you're saying. Our number one task is to get to 10. And so we that needs to be in our mind. And so, you know, we will tackle that subject going forward. I'm going to park that for today because I I still I don't think we're at the top. I think there's more to go for, but I am getting nervous. I don't think anybody ever can call the top like that though. So, it doesn't I don't mind you saying I don't think we're at the top, but it's irrelevant to me because I don't think anybody can actually call the top, especially the bull to my left. >> So, if you're sitting on something that's up 51% and you're almost at your target for the year, then I'm sorry. I would sell all of that and I would go into the Footsie, which is far more defensive. So, my homework is that I want to get my hard hat on and I want to come out of the um expensive volatile assets here cuz I think we've got a correction coming. I think that we've got uh a 6% move lower and um I'm uncomfortable. Now the things I'm comfortable in are gold uh copper the Footsie India Russell 2000 still and the World Mining Trust which I agree with you I'm very happy to increase in but that VANC blockchain innovators for me would be gone and I would be cutting the S&P 500 exposure in half like we did with the NASDAQ before. So, while I wouldn't be moving 100% to cash, I'd be moving the expensive S&P 500 into Footsie and I'd be happy to um to go with you into the the World Mining Trust and a little bit into emerging as well because we've said it's a little bit more defensive, but I can feel the glaring eyes from the bull. Okay, look, I'm going to start with something you might like to hear is that if I am concerned about markets and the US markets in particular at the moment, it is that we are seeing this proliferation in circular or self-funding intercomp deals. Um that that to me is a potential concern. Now that comes about for two reasons historically. Companies take over another company with their equities with the the value of their company when they think the value of their company is very high. So they will use shares to buy another company rather than cash and that sometime is a warning sign that the people with in the stock market the people within those companies managing it thinking their share their own share prices have got too high. Now in this case a lot of it is to do with the AI revolution that's going on. It may be this time and I'm not saying it's different this time. I'm not saying it's different this time. I believe that these companies, particularly the American ones, have worked out this is a massive race to get into the AI revolution and they will get first mover advantage and that's why they're willing to spend billions, hundreds of billions of dollars on it. So that's why I think they are prepared to do these circular self-funding intercomp deals. I get it. But that is my biggest concern. I can see it from both sides. I can see management saying our shares are expensive. Let's use that as currency. And I can see it from the fact that people want to race to get AI done. But I think when you look at our portfolio as a whole, we have what's called a barbell already in our portfolio. So that on one side, we remember earlier episode we talked about antifragile and fragile assets. Fragile assets are the things that move up and down with economic growth and are high more volatile by their very nature. And equities are those. If you added up all of the fragile assets in our portfolio uh and you would take the S&P, NASDAQ, Russell 2000, Nicki at Japan's market, DAX the German market, the Footsie 100 and India, those are all equities. If you added all those up, that's 55% of the portfolio. But on the other side, what we've described as antifragile supposedly do better when times get tough and when stock markets wobble. We've got gold, we've got copper, we've got crypto, we've got black rockck world mining, we've got cash and we've got short guilts. And together they are 45% of the portfolio. So we are balanced already between this fragile and antifragile. That's what you call a barbell. There's nothing really in between. But you have got guns guns on both sides. Now you know you could say that black rockck world mining should be an equity. Therefore, you would maybe make that 60% into into fragile assets and for just 40% in um in antifragile or defensive. So, I'm I'm quite happy with the overall balance of the portfolio as things stand at the moment. I'm a natural bull. I still think we've got further to go, but I do think that I have sympathy with outside of the US then we should be able to make more money by a sort of revaluation of some of these other areas. Emerging markets we've talked about today. I would very happily start there with a 5% position. I'd very happily do that. And the Black Rockck World Mining Trust, which we also own, I would add to that. And part of the reason is if you believe that these deals that the US government are doing, buying stakes in other mining companies, they're not just doing it because they think those those equities are cheap. Maybe they are. Maybe that's the US government saying actually mining equities are cheap >> cuz we know we're going to keep doing it. >> Yeah. But there are there are rumors about that there they may be doing hundreds more of these sort of deals. Now if lots of these little mining companies get takes stakes taken them by US government, I bet you the US government isn't going to be the only one out there doing it. I bet you the Chinese will be thinking about it. I bet you other countries will start thinking about it. And so that should lift the underlying valuation of mining companies relative to other companies. And a lot of the mining companies sit on a discount to the underlying commodity prices that actually they're selling by dayto-day. So they're sitting on a discount already. That discount may close. I'm very happy to put another 5% in black rock mining. >> So you see this is the big difficulty of being a asset allocation committee and what normally happens in the city. Exactly what's going on here is what happens around many many many tables and meeting rooms in the city where people have got strong views in each direction and you know there's no right or wrong answer here. Um only time will tell you what's right or wrong and of course we can't see the future but we can only act on our experience. So if I look at those things together Rich has said sell 5% S&P 500 in Footsie. Well I'm not really interested in that. And then let me tell you why I'm in why why I'm not interested in that. Because if the S&P goes down, the footsie is going down. Everything has taught us in the in in the world. Everything has always taught us. It may not do it over three months, but over the first few days, the first week, first two weeks, Footsie slapped just as hard as the S&P 500. So I don't regard that as a particularly defensive mood. I I regard that as still taking exposure in a softer way. But every time I've ever tried that as a fund manager, it's always been a disaster because what happens is the US guys all come in and buy the S&P, you know, bottom fish in the S&P when they think it's right. They don't come and buy footsie and no one in the but UK ever buys footsie. We know anyway. So it doesn't help. So I I'm going to dismiss that one for the moment because I think I I I don't argue against buying Footsie. If I was bullish of markets, I might buy Footsie because it's better value. That's just a bit if the catalyst is AI related then foot seat bulletproof. >> Yeah. But if it's not AI related then I'm not particularly sure that the markets are going to come back very much anyway. So the VANC I think is an issue for us. There's no doubt about it because it's a large part of our portfolio. It's gone up far more than we ever thought it would. And I'm suggesting we sell it. Not all of it. I'm suggesting we keep a bit. I think Mark's suggesting we keep a bit. Yeah, I'd be happy to sell half of it because I think what I said before it's when we were talking about selling someone it was 30% up. It's now 50% up. >> All right, smart ass. >> I sat on my I I sat on my No, no, no. I'm the chairman. I sat on my hands. I didn't do anything. So don't give me that. >> We'll take the VANC blockchain down to 2 and a half% waiting. >> Yep. And then so then it comes down to the other two. And I think we should add 5% to world mining. I think we all like five the the world mining. And I think we should build a 5% position in the emerging markets and um sit there with those. So as chairman, the decision I'm going to make given the conversation, unless someone's going to throw something at me for for doing it is reducing VANC, take it down to two and a half, putting five extra in the world mining, putting five extra in the emerging market, and take the net seven and a half that's going in out of cash. >> Would you describe that as increasing risk? the VANAX very risky. I would say net net you are increasing risk um but you're not increasing risk by how much the numbers would suggest because as you have correctly stated the VANC is a much more volatile instrument and you're actually moving exposure from the really hot part of the market really hot parts of the market to areas that aren't quite so hot at the moment. They're not cold areas of the market. They're pretty warm. Simmering. Simmering nice. Thank you very much. And so you'll be increasing risk, but by not as much as you think. Um I I do accept though that we are trying to fine-tune things here, but I think we are skillful enough to be able to uh at least show some of our experience through and and think about a better time to sell than now more of our risk assets >> when it's lower in a couple of weeks. Well, if we have to sell when it's lower, then as we've talked about before, one of the great skills of a fund manager is to not remember too much about what they've said or where they've done it because it's more important what goes on in the future than what's actually happened in the past. So, um I I don't like selling things that are off the top or off the boil, but if we have to, that's what we will do. So, I promise you at the start, difficult decisions and difficult conversations had to be made, and there they were. Uh thank you Spice for that deep dive into China and India and uh thank you chairman for trying to take on my role. If uh you like what you've been listening to then please give us a subscribe, give us a like and tell all your family and friends about it. Uh we very much look forward to seeing what markets bring us next week. Gentlemen, if the viewers want to get some questions into us, then where should they write to? The arts of investing at ig.com. >> We'll see you next week. [Music]