London South East 00:01
You're listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice so please do your own research.
Peter Higgins 00:17
Hello and welcome to this very special panel session at the Master Investor Show.
Today I'm hosting a panel with four special guests, they are Gervais Williams, Charlie Huggins, George O'Connor, Stephen Yiu and my panel guests will be answering the question, just how undervalued is the stock market?
And both are in a Q&A session, so please join us for this special session and listen to this recording.
Peter Higgins 00:43
George, thank you ever so much for coming on to my Investing Matters panel today, what will you be sharing with our audience regarding UK markets potentially being undervalued?
George O’Connor 00:51
Well, firstly, thank you very much for the invite. It's absolutely buzzing in here and I'm delighted to be speaking at it, in terms of the underlying story, it's all about how cheap and investable right now is the UK market.
Peter Higgins 01:06
Thank you ever so much George.
Now, I want to ask you about the UK market specifically we seem to be having lots and lots of takeovers. Is that the potential be a catalyst do you think for the UK markets?
George O’Connor 01:16
Absolutely.
So one good indication that the UK market is cheap is that we've got a lot of skanky buyers coming in right now both private equity and from their trade as well not a day starts in the morning of looking at London South East and they say another takeover is announced. It's telling us the market is cheap.
Peter Higgins 01:34
Brilliant, George, I'm really looking forward to panel session. Thank you for joining us, you’re an absolute star.
George O’Connor 01:37
Thank you Peter.
Peter Higgins 01:40
Hello, ladies and gentlemen, today I've got Charlie Huggins from the Wealth Club who will be one of the panel guests on Investing Matters Special panel, talking about UK undervalued stocks, Charlie what are you going to be talking about today with us?
Charlie Huggins 01:53
I’m going to talk through the UK market, the main sectors within the UK market, because if you are investing in the UK market, you need to know what you're actually buying, and what is the UK market made of.
So we're going to run through the major sectors, I'm going to give my views on those sectors and then I'm going to mention some stocks specifics to get into a few companies that I like, and some of which that I own in my own quality share portfolio.
Peter Higgins 02:18
Thank you so much.
Are you going to be sticking to the UK or you're going to be looking elsewhere as well?
Charlie Huggins 02:22
It’s all focused on the UK. But you know, there are some very good businesses in the UK that don't necessarily generate much of their sales from the UK. But yeah, have good business.
Peter Higgins 02:33
Thank you very much, look forward to hearing your session later on.
A very good afternoon, ladies and gentlemen. Today, I have Gervais Williams doing a presentation for the Investing Matters panel and will talk about undervalued UK shares, stocks, etc. Gervais what's the topic of your conversation going to be about today?
Gervais Williams 02:50
Well, I think actually, it's too easy to assume that the tailwinds of markets is just going to carry on.
They may carry on they may carry on for a while yet and actually there are long periods when markets don't go up.
Specifically, they often flatline and sometimes they actually fall, I think people just have no idea of just how long those periods can be.
If you go to the S&P Index, S&P 500, everyone's terribly excited about that.
But the tech stocks and growth stocks, UK, US economy done really well.
But unfortunately, between 1900 and 1950, the US stock market, the S&P 500 didn't go up in real terms for 50 years.
Also, that point of view. It's not just good, the tailwinds are there at the moment but we need to find opportunities.
And that's when people have to move away from bigness into smallness.
And specifically, what I'm going to cover is, I think, actually, the UK has more small caps and most other global markets, I think the smaller the better, because the small cap effect, I think the UK is disgustingly cheap, I think we were in a superb position to make some really attractive returns.
Peter Higgins 03:49
Brilliant, looking very much forward to that Gervais.
Thank you ever so much sharing your information with us today, thank you.
Hi, Stephen, you're going to be on a panel session with me today for the Investment Matters panel, can you just tell us a little bit about what you're going to be talking about on the topic of the UK stock market being potentially undervalued?
Stephen Yiu 04:06
So I want to probably expand a lot more about how the world might have changed.
And there was a time when I started my career at UK equities was very attractive, but the world might have moved on.
And secondly, I want to expand on why investing in businesses, high quality businesses that could make money for investors and doesn't really matter where those companies are listed, whether it's UK or the US or some other country.
Peter Higgins 04:33
Brilliant, we're really looking forward to your session and it's going to be fantastic.
I know you're always deliver as well, Stephen. So thank you ever so much for that. Look forward to it.
Thank you.
Presenter/MC 04:43
Good afternoon, everyone. Thank you for coming to this talk. I've got Peter Higgins here from London South East.
And we've got a great panel discussion on how undervalued is the UK stock market currently.
Peter Higgins 05:00
Thank you very much. check mike check, mike can hear me everybody?
Thank you very much. Okay, as we just said, my name is Peter Higgins, I'm the host of the Investing Matters Podcast.
Today we're going to talk about how undervalued the UK stock market is.
And I've got a stellar panel for you.
I've got George O'Connor coming up first, Research Analyst at Progressive Research, followed by Charlie Huggins, Head of Equities at Wealth Club, followed by Gervais Williams, Head of Equities at Premier Miton Investors.
And then we've got Stephen Yiu, Lead manager of Blue Whale Growth Fund.
We're very short on time, so I'm just going to get straight into it, and introduce my first guest, can have a round of applause for George O'Connor, please.
George O’Connor 05:49
Hey there, Peter, many thanks for the opportunity.
And good afternoon, everyone.
Can I have a small indulgence before we do anything?
I recently joined, Progressive and our founder Gareth is here.
And I say that and I've taken my glasses off, so he's here somewhere.
If anyone's got a business card, give them all to Gareth on the way out.
In terms of the bad news, Peter, I don't even believe in your core proposition.
Is the UK and I speak from a tech side is the UK market cheap? Who cares?
Tech is a story of fundamentals and sentiment, you've got to get both of those right, in terms of coming up with an interesting investment case on a tech stock, who wants to wake up every morning next to zombie stock who wants to spend their time in a value trap?
And that has been the story in terms of the UK market for a while, when did sentiment changed, probably back end of 2021.
If you can remember what happened then was the interest rate environment changed.
As the cost of capital went up for the sector, the returns started to fall away pretty quickly.
So one of my poorest years was 2022 TSR was minus 22%.
Since then, the macro has been not the big story, but pretty much the only story in terms of the tech sector. And in terms of where we are today, higher for longer translates to lower for longer from a valuation perspective.
Currently, in terms of my patch, stocks are trading on a P/E of around 19.
If I look over the long-term, so let's just forget about dotcom for a minute to look for a long-term.
So start the clock at 2002, sort of average P/E has been somewhere between 17 and 19.
On a high part of the cycle, it can go straight up to 27.
So yeah, it's cheap.
But if there's no momentum in there, does it really count.
So what we need is really for sort of for the macro environment to start changing.
And then we've got a great trigger event.
Sell side people, investment bankers, tech guys have been around for a long-time sector is cheap, when in fact, it's been really expensive.
This sort of the first time we can say convincingly, tech looks really cheap. In addition to that, we're at the start of a new tech cycle, tech cycle driven by Gen AI.
Just for a slight moment, let's think about what Gen AI is.
On one side, it's a big store of memory. On the second side, it's something that deals with plausibility, not facts.
On the third side, it deals with hallucinations. I mean, I've scored three out of three in terms of what I bring to that party. If we look and think about a use cases, I think sort of the sort of the most current is Klarna.
I don't know if you know our use Klarna sort of pay sort of buy now pay later maybe pay forever.
But they've been in the press talking about saving 40 million US on their bottom line.
And that was on the back of a Chat GPT implementation.
They've managed to take out 700 of their call center staff.
I've been working in investment banks for over 20 years.
Most of that my life is really in a call center.
Gen AI gives us a white-collar revolution.
In addition to a great valuation story, in addition to a great story around the start of a new tech cycle.
We also have the notion that possibly the interest rate environment starts to come down.
If it does come down, we've got a great trigger.
I'm in the waiting room, just like the rest of you.
Tech sector sentiment has started to budge.
If we look at it from a sort of a TSR perspective, in terms of year to date for me, we're at plus 3.5.
And you can say, that's nothing but it's you know, the compare is minus 22% in 2022, and minus 9.7% in 2023.
So it's moving in the right area, in terms of stocks, because that's what I do.
I do stock picking, I still think we're in for a little bit of a fragile time, This year Macro isn't great.
Now in fairness, for reporting season has been okay, there's always a couple of howlers, so we've had a few howlers.
But generally I'd want to be more on this sort of on the risk off rather than risk on until we get that trigger.
If you're looking at sort of larger companies stuff like Computacenter, we've had in the semis industry, the great unwind, and that's really around supply chains, and how that's impacted someone like Computacenter for a reselling side, it means they've been able to work down their inventory and from that there's bags of cash there so that bags of cash should turn into a special dividend.
If you're looking sort of for lower down in terms of market caps.
Some of the themes we really like the sort of the sector drive on Cloud suddenly called Beeks
Financial if you're looking there, great story in terms of future earnings upgrades. company called Oxford Metrics is another one not in is but really well positioned.
In terms of the sort of what we did post COVID.
We all went traveling, so in there sort of in terms of travel tech, something like a Hostelworld, it's really well positioned and cheap as well in terms of other areas.
The IT services side have been absolutely battered.
From a valuation perspective, they are cheap, but they don't have any momentum this year because the sort of the players in that stuff like Made Tech or TPXimpact tied into sort of UK budget.
This is a UK public sector budget. This is a sort of an election year so have a bit of a pullback in terms of spend.
Clearly, you're spending up to the 31st of March in terms of the public sector market, but sentiment will remain poor.
But elections do tend to play out there is a winner, spend start again next year.
So I would look at them for next year.
In terms of avoids sort of Darktrace and Sage from the from the top end in terms of the wildcard, Capita, a new CFO sorry, new CEO in their Adolfo has come out of Amazon if anyone gets and understands Gen AI, he does.
There is a sort of a CMD event in June, that that should be wall to wall about Gen AI. I've left the room.
I thought I was doing so well. But I'm done.
Peter Higgins 13:13
Fantastic Ladies and Gents, can you give me one question, please for George regarding his presentation, and we'll do that for each presentation going forward?
Anybody got bold enough to give George one question. You've answered all the questions George. George O'Connor. My next guest is Charlie Huggins from Wealth Club.
Charlie, go for it.
Charlie Huggins 13:37
Thanks, Peter. So my little talk is about whether to invest in the UK.
Should you invest in the UK? I think in order to answer that question, you need to understand what the subcomponents of the UK market are.
It's no good saying broad brush terms should you invest in the UK.
So I plan to spend a little bit of time just going through some of the major sectors in the UK give you my views for whatever they're worth. So, the financials is about 25% of FTSE All Share Index of which banks are a major part of that.
Personally, I don't like banks, I don't think banks are a good place to invest. Very competitive sector, very cyclical, very financially leveraged, dividend yields high, yes, but at the mercy of regulators.
Regulation is a constant and growing threat for the banks.
So big part of the UK market banks personally in my portfolio, which is a global portfolio, I do not own any banks, basic materials and energy, which is about 25% of the FTSE All Share Index lumped together better than banks, but still lots of risk in those sectors. very cyclical, very capital intensive, constantly having to spend to replenish and grow production returns on that spending uncertain.
Because no one knows what's going to happen to commodity prices. So won't surprise you to know I don't own any basic materials or energy in my portfolio.
Consumer staples is another big part of the UK index and historically that has been quite a reliable place to invest.
But challenges here too, risks growing for that sector, arguably, tobacco, Imperial Brands and BATs being the main ones in the UK, facing huge challenges navigating this transition from combustibles to next generation products, very uncertain how that's going to play out, layer on a fraught financial fraud regulatory landscape on top and a lot of financial leverage.
Not one for the faint hearted. Even Unilever and Reckitt, face growing risks, and I'm finding life harder today than they were, say five or 10 years ago, in my opinion, the internet opened the playing field for smaller, more agile peers.
Private label competition in a cost of living crisis has arguably never been more intense.
And consumers are increasingly fickle, very little consumer loyalty now towards big brands, even people getting away from say, Heinz Beans.
So consumer staples giants having to run harder just to stand still and then final sector I'll touch on healthcare, dominated in the UK by GlaxoSmithKline and AstraZeneca.
The success of these will always live or die by the drug pipelines. And that's very difficult to predict I did a biochemistry degree and I can't do it.
So and success can also be a double edged sword for that sector, so you get a blockbuster drug.
But then it comes off patent and then new competition enters generic competition enters in lung sales for the key drug start to decline.
This happened with AstraZeneca so the UK as a whole in my view is an uninspiring place to invest. You look at the long-term prospects for most of the major sectors and they are questionable.
The UK market does not have anything close to a Nvidia, Microsoft Apple.
However, I'm not total bear on the UK you might be surprised to learn.
There are gems to be found in the UK market.
So 40% of my quality shares portfolio which is a 50 in stock global portfolio, 40% of the names are UK listed including one or two that we're about to mention.
So one of the best run retailers in the world, Amazon, maybe, Next PLC run by Simon Wolfson for the last two and a half decades, exceptional CEO exceptional business.
In contract catering, I'm not aware of anyone better than Compass Group, contract catering is a sector where scale really matters.
And Compass is the market leader by far the global market leader in contract catering.
And it has a very, very strong market position and that's a UK listed business.
UK is not known for its technology businesses. But there are some exceptional technology businesses here in the UK, including data titans, RELX and Experian.
These two businesses are unparalleled globally, they are market leaders within their sectors, not aware of any businesses that are better than those two in what they do.
And they have exceptional long-term prospects in my view and let's not forget the UK is also home to some phenomenal industrial businesses.
Halma, Spirax Sarco, the steam specialist has a fantastic bio processing business as well, biotechnology business specialist distributor Diploma, you won't find many industrial businesses globally with a better long-term track record than those.
So overall summary, UK if you're looking for a broad-brush way to invest, I personally would not invest in the UK I would invest in a US or wealth tracker or buy Stephen Yiu’s fund or mine.
But if you're going to be very selective, if you're going to cast your net far and wide, then the UK does have some exceptional businesses.
Peter Higgins 19:41
Thanks Gents, thank you very much Charlie Huggins, whilst Charlie takes a seat, have you got a question for Charlie anybody?
Audience member 19:50
Yeah. If no one has.
Peter Higgins 19:53
Go for it, make it a good one.
Audience Member 19:54
Yeah, you mentioned that 40% of your stock, I mean globally you have 40% is in the UK market. At the end, you said if I were you, I wouldn't invest in the UK market. So, what made that paradigm shift? You know?
Charlie Huggins 20:11
Yes, good question.
So what I what I mean by I would not invest in the UK, I would not invest in the UK tracker.
Because if you invest in the UK, passive FTSE All Share tracker, you get the sectors I just mentioned the oils and the banks and the commodities.
If you're an active manager like me, I couldn't care less where a company is listed. I couldn't really care less where the sales come from. I'm just looking for the best businesses I can find.
And I find some very, very good ones in the UK because I've been following the UK market for probably 15-20 years. So yeah, there are some great businesses that you've got to go looking for.
Peter Higgins 20:47
Thank you for the question. Thank you for the answer there, Charlie.
Ladies and Gentleman, we’ve got Gervais Williams, Head of Equities, Premier Miton Investors, can we get a round of a applause for Gervais Williams please.
Gervais Williams 21:00
Thanks for coming along today.
Well, you've heard from George and Charlie, really similar, UK is full of relatively dull companies, which don't grow properly.
And I could have said that five or 10 years ago, and it you know, obviously it may carry on.
As it happens, though, things you got to be careful with stock markets, they don't just do the same thing year in year out.
They have long periods actually, when stock markets actually outperform if you take the last 10 or 20 years, nearly all global markets have outperformed inflation, something rotten.
But there's lots of other periods when markets flatline, sometimes 5-10 years. If you take it in real terms, discounting for inflation between 1900-1950, the US stock market S&P full of these tech stocks we've just heard about didn't go up for 50 years.
You've got to be very careful about assuming that the tailwind will always be there.
I don't think it will be I think we've globalisation tailwind except that beyond globalisation.
Absolutely no, you've got to be very careful about the tailwind.
I don't think the tailwind is going to be there.
So I think we're going to go into a period of change specifically, I think you know, that compromises of globalisation have become politics.
And politics really means that we're all reshoring, that's bringing in inflation.
We've got some nationalistic agendas, we don't really care about our neighbors, we care about ourselves.
First, you get geopolitical events.
And of course, you get lots of immigration control, more inflation.
And we saw what happened in 22 to George’s portfolio, it went down, right?
So my assumption is actually that we're going to be in a period of, you know, beyond globalisation from here.
And if we go beyond globalisation, then in my view, yes, you get some tech stocks and some way, shape or form.
But specifically, the companies, which actually have more advantages, the most people think are companies which actually are capital intensive.
What do I mean by that?
Not just mining companies, but financials, some manufacturing, some defense companies, certain mining companies, as well, except that, but the great advantage is, the more interest rates go up, and the more they stay up, actually, the harder it is actually to put capital into these businesses, the more advantage you have as a capital business.
So if you go back to the 60s and 70s, and let's remember, the UK economy was pretty rubbish.
In that period, we have three-day weeks, we actually ran out of money, just like Argentina, the IMF had to rescue us in 1976.
But actually the UK stock market full of these very boring and dull companies, because they're capital intensive cash compounding works really well, when capital is short, the UK market was pretty much the best in the world.
And it was still very boring companies and probably a little bit more boring in those days.
So actually, I think the UK market is going to outperform, it's disgustingly cheap.
We know that I could have said that five and 10 years ago, but most particularly, you know, beyond globalisation, the politics is coming through, it's making a bigger, bigger difference.
And so really, actually, it's not just about the UK performing, and don't get me wrong, it's not the UK economy I'm talking about, I'm talking about the UK stock market.
But on top of that, of course, it beyond globalisation, you know, we've had too much bigness during globalisation, we need more smallness, it just so happens the UK market is dominant, not just in in capital intensive income compounders at the top, but most particularly as you move down the market cap range, yes, you can get some mid-cap, but nearly unique in the world, you can get into the smaller micro-cap.
And the smaller the company, the better the performance. They're standing on crazily low valuations, if you take since the end of ‘91, sorry 2021 effectively, small caps have had a you know, surge of sellers there aren't many buyers.
Effectively the AIM market, the FTSE markets underperformed the FTSE 100 by 60 or 65%.
It's just amazing. I'm more bullish now than I've been for 30 years, not just for the UK stock market not but most particularly for small-micro I think we're sitting on a goldmine we just don't happen to know it and, and the advantage of these companies isn't just that they you know, they survived some of them succeed. The more the tougher it gets, the more opportunities to buy it by acquisitions.
We heard from George about Next may have been Charlie.
Next is a brilliant business they've just bought some companies from Aquis from receivership, it's great buying them from receivership, you pay very little, little money.
So made.com or whatever they pay 3.2 or 3.4 million for.
That was a business which have been valued at, say, five or 600 million, probably only worth 300.
Now, if you're 9 billion market cap, it's great to make an acquisition adding 300 million, great stuff.
But just think of that 300 million pound company doing the same deal.
The uplift is so great, so much greater if you're 30 million pound company, okay, you may need to raise 30 or 50 million to actually do the deal.
But the upside is transformational to your profits.
That's what happened in the 70s.
The small cap sector was the best performing part of the world.
That's what I think's coming, we're sitting on companies, which are disgustingly cheap, which could start with the option value, the upside option value to come through another example of a company which has already succeeded, I think will continue to succeed.
A company called Yu Group you probably don't know it, it's a utility company.
It's a bit like British Gas, it's a bit like E.ON, except it's tiny.
It just serves the corporate sector. But it did have a wobble, share price went down to 18 million market cap.
This is in 2020 with the wobble in the market, this year is just finished, it's got 80 million cash in the balance sheet, no debt.
The forecasts are that they have 110 or 111 million of cash at the end of this year, it's just started about 141.
According to the analysts, I think they're too low. I may be wrong. So the share price isn't 80 million.
Okay, just so you know, the share price is about just over 200 It's gone up over 10 fold this, it's gone up twice as fast actually as Nvidia, just so you know.
So you get this option value in small micro-caps. They were just sitting out there, go do the work.
You'll love it.
Presenter/MC 26:54
Got one question.
Audience member 27:02
Hi Gervais, it seems as if a lot of the selling in the market in the small-cap sector in particular has been because of forced selling to satisfy redemptions? Can you give us an indication of where you think that trend is heading at this point in time?
Gervais Williams 27:17
Yes, I mean, what we've seen really is capital follows returns.
So what we've seen over the last 30 years, of course, is globalisation.
We've seen mega-caps, more indexation that favors as active funds redeemed, passive funds bought you overweight, or you put more capital into large companies so you get this mega-cap trend.
It's not just in the US, actually, you know, you can use European companies as well.
So anyway, it's a very significant trend and people, you know, when you get a turn, people are slow to do the turn.
So we've got that kind of clearing at the bottom of the market.
So there's still a few people selling just about everyone internationally has come out of the UK, there's hardly any active managers, they might have a few Shell rather than the, you know, perhaps a US equivalent Chevron or something.
But most particularly, nearly everyone sold internationally, local investors, they do have an overweight position in the UK, and they've been embarrassed, they've got a lot of scar tissue, they keep selling.
So we are actually that period where they keep selling. So what I'm looking for actually, of course, is for even a slight reduction in selling, because I think at that stage, we're at a hair trigger, the market breaks out on the upside, just like Japan, and then the sellers just think you know what I'm going to hold back, I'm going to hold back just to see what happens.
And when they hold back, of course the market roofs it because they're not selling any longer.
So you've got this unstable equilibrium when is it going to finish? I was rather hoping the budget would actually bring in the ISA, it’s only 5,000.
But we're hoping they do it for new tax year.
We're into consultation, it'll be next year, so that's it.
So I think it'll just be takeovers, which started you know, we started saving almost one a day now.
And that cash will come through. And as soon as those takeovers overwhelm the local sellers, then you get this hair trigger market breaks out and the upside sellers dry up, and we're on our way.
Peter Higgins 28:55
Brilliant reply, thank you so much. Thank you, Ladies and Gentlemen, Gervais Williams. Okay, my final guest, Stephen Yiu, Blue Whale Growth Fund, audience is yours, Ladies and Gents, a round of a applause for our man Stephen.
Stephen Yiu 29:14
Thank you very much for staying until 4pm now, so what I have got prepped is I want to share with you a little bit about my personal journey.
So 20 years ago, I started my career at Hargreaves Lansdown, and at a time I was involved in picking fund managers.
And at that time, obviously, that was between 2002 until 2007.
And at the time, I have a lot of aspiration to become a UK fund manager because I met up with many exceptional fund managers at the time in that period.
And so in 2007 I got my opportunity to become a UK fund manager so I was a UK fund manager, picking mid to large cap companies in the UK for about six years, until 2013.
And I would say, fortunately, I'm done and moved on.
And I've gone on to looking after covering global companies and a previous hedge fund and since then have started Blue Whale Growth Fund, which is a global strategy that we have about two thirds in the US and with very small exposure to the UK.
So what, how would I categorise my journey or experience who then is I, I would think the world has moved on.
From my personal perspective of course, if that is not the case, I would think we would have many more companies that we invest into with the current strategy.
There's a lot of things that have changed. I think people sitting in the UK don't recognise that.
Not sure why. But people in the US probably recognise that the world has moved on.
And there's a lot to do with technology with the cloud with subscription with the smartphone era.
Now we have the Gen AI.
And of course, if you look at the UK companies that we don't have any of this, which is where the world is heading.
And recently, I spoke to some journalists about the British ISA, which obviously to me, I mean, hopefully no one is going to quote me on this is a rip off for anyone who have an extra 5,000 pounds.
Because if I think about this, going back to Charlie's comments that if you just were to pick a typical company, which most people do, or you just buy the index tracker.
So what I have got in terms of data point is since we started running the strategy back in September 17, until now, six and a half years now, the FTSE 350 index total return, including all the dividends, we investors had deliver an annualized performance of about 4% per year 4% a year.
I mean, just imagine inflation.
So that's 4% every year for the last six and a half years. If you have invested in the global stock market, let's say iShares MSCI World Index, you would have got about probably 10%, a year, about two thirds of that is in the US.
And if you have managed to invest into our fund, and we have done a few percent more so we analyze about 14%.
So what I was trying to say is when the tailwind is not you don't have to, you don't have to tailwinds in terms of where the world is heading is a lot more difficult to deliver alpha.
So if you ask me to try to deliver 14% per annum per annum, picking a UK company, I think that's impossible to do that because most companies don't give you that it's just a lot more difficult.
And the second point I want to make is like what do we actually do is I do agree with Charlie a lot that we focus into high quality businesses, so it doesn't matter where you find them.
But where we have found most of our company are in the US. And I recall this narrative about two and a half years ago, when Microsoft market cap just passed $1.5 trillion.
About two and a half years ago, there was loads of headlines in the UK saying this is a bubble.
How is it possible for Microsoft to be at $1.5 trillion is exactly the same size as the UK stock market, which we have a few 1000 companies. That is a bubble that is not right. Only about two and a half years later, Microsoft is $3 trillion and still bigger than the UK stock market.
The second time I've seen this narrative, as some of you might know that we are large, bigger backer of Nvidia shares, which remain so we have done very well on the back of that.
And recently, I just saw a post on social media also within the UK investor context and Nvidia’s market cap just past $2 trillion, which is the same size as the FTSE 350 index, that is a bubble that is not right.
People can make whatever comments they want to do.
But the most important thing is you want to invest into a company that can make more money over time, you want to maximize the money-making opportunity through companies selling more of their products and services.
Hopefully, they can dominate the world, which means that the TAM, they can sell more of their products are bigger than we are then our company that are very limited to your market. So we just ended up finding more of this company in the US.
And I'm sure in the UK, we have a few. But it's more difficult to do that. So I think with any investor in this room, I mean, you should start with a blank piece of paper. Should I have a home bias and I would argue that every investor has a home bias.
We have a home bias to the UK stock market because we all live here, that American would have a home bias to the American stock market and they have done a lot better than us with the same home bias.
So if you're in the wrong home, then your bias is going to cost you money. So that's my prep
Peter Higgins 35:01
Ladies and gents, Stephen Yiu, got an audience member got one question please. Thank you very much. And then we're going to open it up. We've got maybe one minute, I think to grab one more question from the floor to any of the panel to say who that question is to please.
Audience member 35:20
Thank you, Stephen, my question is about what do you think about MicroStrategy and Coinbase?
Stephen Yiu 35:24
This one is probably not relevant for this room.
Peter Higgins 35:30
We have another question for anybody else on the panel or a proper question for Stephen. Okay. Just there for this one's for Stephen, first, please.
Audience member 35:41
Hi, Stephen, thanks for your presentation. My question is quite a simple one. What effect do you think quantitative easing has had on the outperformance of the US market? And do you think that that's likely to reverse now that the macroeconomic picture is changing?
Stephen Yiu 35:55
That's a great question, so I shared in my presentation just in the room earlier that the so we did not do well, you clearly our fund lost money in the first six months of 2022.
And then we have recovered very strongly over the last 18 months.
And we have managed to get above our high watermark.
But it was important to remember was the drivers behind the level of underperformance in first half of 2022.
And of course, that was due to quantitative tightening, not quantitative easing interest rate going up at the same time.
But when you look at the interest rate regime in July 2022, the interest rate has actually gone up until now.
So if you look at the US 10 year, in July in 2022, it was at less than 3%.
Now it's less than 4%. If you look at the real yield in the US, it was less than 1%.
Now it's less than 2%. So the market or the company that we were exposed to, we have not actually got the benefit, or the how we suffer in the first six months.
So if interest rate does come back down, if we do get quantitive easing, I think we might make back some of those underperformance at a time but the outperformance that we deliver was purely down to the company fundamentals or earnings power of the likes of Nvidia or Microsoft, etc.
Peter Higgins 37:10
Brilliant, reply, thank you very much, Stephen. Ladies and Gents, Stephen Yiu.
Going to take I think we've got time for one more question, maybe two from the floor and tell me who the question is to please?
Anyone else going to stick their hands up so I can get them prepped for the next question after this one?
Audience member 37:37
In the US has been driven mainly by The Magnificent Seven, as they call it. What is the opinion of the panel about the other companies? Because really, and truly, the market is grown by The Magnificent Seven only.
Peter Higgins 37:54
George, I'm picking on you. How would you like to answer that, Sir?
George O’Connor 38:02
The Magnificent Seven if they're not expensive, that probably for me is the is the big reveal.
They've got a great pay, because they're delivering great earnings growth. I don't know if you sort of look through Nvidia’s results.
But I mean, they are stellar from a numbers perspective, if you're looking outside of it, we've had the sort of valuation gap for quite a long time with America.
And that remains a constant. But ex- the Magnificent Seven, the US sort of general techie shares there.
They're more expensive than UK. So I don't know, on an EBITDA basis UK is about 15, the Americans are about 22.
But in that you can get massive pockets. So the most expensive Americans odd enough, they're in the sort of the data analytics side rather than on the AI side stuff like snowflake JFrog, MongoDB. So you can get very expensive ones out there.
Peter Higgins 39:00
Thank you very much. Thank you very much, George, I've got Gervais to add on to that as well.
Gervais Williams 39:05
I’d add onto that, that really, it keeps changing doesn't it?
Ever notice how actually it used to be called FAANGS. And it was FAANGS plus and double A and all rest of it.
I mean, if I just pick out the stocks, which have been the top performance of my portfolio, they did really well too, right, so I think there's a kind of narrowness there.
And yes, they’re companies, they do go up, but boy, do they come down. I mean, Tesla was wonderful, but it's halved since two years ago.
It's still part of the FAANGS.
Sorry it’s still called the Magnificent Seven at the moment.
We're starting to see others coming under pressure.
Now we've started to see problems, not massive problems, but Google's coming off/Alphabet it's coming under a bit of pressure etc. So they’re fine at that moment, but I just think it's a fad.
Peter Higgins 39:45
Oh, interesting. Interesting. We're going to take one question and then we're going to have to cut, go there. Thank you ever so much for staying with us as well. Ladies and Gents really appreciate it.
Audience speaker 39:53
Thank you very much.
Peter Higgins 39:54
Who's the question to please?
Audience speaker 39:56
Actually, to all the panelists, maybe one sentence each is so if any of them could share one their top idea for the next three years and I understand everyone has constraints…
Peter Higgins 40:07
That’s a question and a half maybe you have to pay for that one for charity portfolios and choose the charity going to donate somebody to and I'll get them to answer. Okay, okay, Stephen you want to go one stock? It can be overseas, doesn’t have to be UK.
Stephen Yiu 40:23
Yeah I still would back Nvidia just make it simple.
Peter Higgins 40:27
Very quickly. Gervais one stock UK go for it.
Gervais Williams 40:30
Yeah I think I'll probably go CyanConnode. So there's 30 million market cap. It's number one in Indian smart metering, and they're tendering for 1.1 billion pounds contracts.
Peter Higgins 40:40
Thank you very much, Charlie?
Charlie Huggins 40:43
Tricky, one stock.
I'll go for one that's had a really tough time Croda, which has speciality chemicals, it's been hit by massive destocking.
It's got a very, very interesting healthcare part of its business. It does drug delivery systems on new biological drugs that are coming. It's got very diverse positions across preclinical and clinical pipelines.
Once those drugs come to market, it should do well, but you're looking at 2025 onwards for that at the moment, it's still finding life a bit tough because those drugs haven't launched yet.
Peter Higgins 41:12
Thank you very much, Charlie, and yourself George?
George O’Connor 41:15
Computacenter.
Peter Higgins 41:18
Computacenter, Computacenter and computacenter from George, Ladies and Gents, that's my panel session. Thank you ever so much.
You can find all of these individuals on the Investing matters platform on Spotify, Apple, iTunes, they've all been interviewed before.
Just find them on Spotify and go listen to their previous interviews, wonderful interviews, by the way, and another 60 others as well.
So thank you very much. Take care, God bless you all.
Peter Higgins 41:46
Okay, so George, you've just been on the panel session. Wonderful presentation, Sir, shared some really great insights. Just give us a little recap of what we talked about what you thought about the audience participation and the other panels?
George O’Connor 41:56
I am still shaking, what an event you had standing room only I had no idea and it wasn't full of my relatives, it was informed investors in the room who were looking for the story.
Great illustration of where the market is right now.
People are saying the market that's cheap. My concern, do we have enough underlying momentum?
So where is the fusion between the fundamentals, the stuff that's cheap, and the sentiment, let's get it moving?
Everyone is waiting for that trigger point right now we've had higher for longer from a macro side that's led to lower for longer, but these move in sync when one drops the other pops.
Peter Higgins 42:36
Absolutely. So let me just ask you this additional question. If I be sold bold, what do you think would be the triggers to get the catalyst for the markets has stopped being so undervalued as well? What’s your view?
George O’connor 42:46
We had earnings mentioned, if you spotted numbers are coming in, you have your few howlers all of the times that will go we will say at the start of a new technology cycle built around Gen AI so there's lots to get excited about here at the moment. It's the economy it's what the macro is doing. And that's what we're looking for in terms of our trigger.
Peter Higgins 43:05
Fantastic George. Thank you ever so much for the support they give so much being on the panel session. Love it.
George O’Connor 43:09
Thank you very much to you too.
Peter Higgins 43:11
They care mate, god bless you, Charlie we just finished the panel session did you enjoy and what did you actually finish speaking about the woods bits of it? Did you enjoy?
Charlie Huggins 43:20
Yeah, I’ve really enjoyed it I thought the was a very well attended event which is great. A great list of guests, Stephen Yiu and Gervais Williams, and a really good lineup this year, I really enjoyed it.
I talked about the major UK sectors, my views on those sectors, why I believe that the long term prospects of those sectors aren't necessarily great, but then hopefully put a bit of a positive spin on it at the end. I'm mentioning a few UK names that I do actually like and I think I'm very good long term prospects.
Peter Higgins 43:56
You mentioned one name in particular that seemed to get lots of people's attention regarding oh I’ve not heard about that stock it before beginning with a C?
Charlie Huggins 44:04
Well someone asked me at the end, when I'd stopped, I think, for the next three years. So I mentioned a company called Croda, which is a speciality chemicals company. And it's had a tough time very tough time recently with de-stockings, so customers reducing inventories and with a weaker economy, but with hopefully better prospects looking forward.
Peter Higgins 44:27
Charlie, fantastic panel, again, thanks for sharing your insights with me. Take care, god bless.
Charlie Huggins 44:33
Thank you very much.
Peter Higgins 44:36
Gervais, we've just finished the Investing Matters panel, we just give us a recap of what you've discussed, and if you enjoy the panel as well?
Gervais Williams 44:43
But I suppose what was more interesting than I expected was actually was the other panelists actually seems to be much more comfortable than assuming the current trend will continue.
It may do I'm certainly as I was saying, I know it's going to end but that's after, you know globalisation has been in place for so many years.
Now we're getting into fragments, the compromise is globalisation, the politics is changing the assume that the market analysts are going to continue.
I was very surprised that so many others were actually so comfortable, just assume the current trends continue.
Clearly, it's up, something's got to change. It's also you know, it doesn't things don't always change, they don't change quite as quickly.
So from that point of view, if I can see my position is not easy to take for people to believe that valuations are lower, you can get individual small caps with extraordinary options side upside.
I'm talking about Yu Group, you know, we invested that company four years ago 2020. It's got up to twice as fast as Nvidia. Most people just have no idea about this micro-cap.
Peter Higgins 45:42
It did have some significant takeovers as well, as he spoke about directly. That could be a potential catalyst in the market as well. Do you think?
Gervais Willams 45:49
Yeah, we've had local sellers and anything which overwhelms local sellers, takeovers, cash takeovers, will actually then possibly lead to the market actually starting to not just fall but start to rise.
And once you get that momentum, I think that will mean that the sellers, which have been dominant recently, will just pause for a moment.
And I think that most moment will actually accelerate the upside.
My assumption is the UK FTSE 100 breaks out of the upside that just like Japan, I don't know when three months or a bit longer, but the point is, that's where we are. It's all a hair trigger at the moment.
Peter Higgins 46:20
There's a little bit of overconfidence in the markets now, in comparison to the UK?
Gervais Williams 46:23
Not just that the valuations, the UK, you know, having been out of fashion for 30 or 40 years, are standing on extraordinarily low valuations. I'm talking about FTSE 100, clearly small companies the AIM market and actually underperformed with the local sellers, or recently, so actually, it's standing absurdly no valuations, it's a great place to start to make money to get involved in companies which are starting at absurdly low valuations. And of course, if they start to not just stop underperforming, but start outperforming the return can be quite considerable in terms of price returns.
Peter Higgins 46:52
Brilliant, Gervais Williams, Premier Miton Investors that gave us so much to share your insights with us today. Thank you very much. Take care. So Steve, we've just completed the Investing Matters panel with our three other fantastic guests. What did you actually deliver and speak about? And did you enjoy it?
Stephen Yiu 47:07
I did enjoy it very much.
Peter thank you for the opportunity. I mentioned two points. I think the first point some people might hate me for that, the British ISA is probably a mistake.
And if I look back at the return of the FTSE 350 index total return over six and a half years, it has annualized at about 4% a year.
So I think that could be the best case scenario in terms of UK equities is concerned.
But secondly, I mentioned about home biases, and what American investors has equally got the home biases, but they got the right market or the home to have that bias.
And of course, if you look at the US stock market is analyzed at least double of that rate of what the UK markets deliver.
And so for investors in the UK, we have a global mindset, we are smart, and we should just consider where you can find the best company rather than just focusing more on a particular market.
Peter Higgins 48:03
So with regards to the UK market being undervalued, they think the time will come eventually when there'll be a catalyst for the UK market in comparison to the sentiment super positive regarding elsewhere at the moment, especially in UK, US Tech sorry.
Stephen Yiu 48:18
I probably don't agree with that view that might be a time that UK equities would be in favor again.
I think the way as a bottom-up stock pickers is we focus on companies.
So if you asked me what are what are the scenarios that UK British companies are going to make a lot more money globally, doing what they're doing today, because we're in a new world, I just cannot see that happening.
And of course, you can have the valuation moving from a very low P/E to maybe slightly higher P/E, and maybe people make money but the point about the whole thing is probably it's not sustainable.
You want the company to be able to deliver the earnings growth trajectory over the many years to come, and that earnings quarters record need to be sustainable.
So once you get to a higher P/E, that you're not selling, you're not taking profit, and you're going to hold on to the share, you're probably going to invest more, and I just cannot see that happening within the UK stock market.
But in some ways, I think there's a lot more M&A activities second place now. And of course that could provide a support. But there's so many companies you probably need to spend some time to pick out which one might be the next target.
Peter Higgins 49:28
Fantastic reply, Stephen thank you ever so much for joining us on the Investing Matters panel.
Absolutely star, take care god bless you.
A very good afternoon to you Ladies and Gents.
Thank you ever so much for listening to this Investing Matters Podcast this special at the Master Investor show was an absolute delight to record.
We have such a stellar panel of guests of George O'Connor, Stephen Yiu, Gervais Williams and Charlie Huggins, packed room, great questions and as I said earlier, if you really enjoyed this podcast, please do give us some feedback.
And please do go to YouTube, Spotify, or any of the platforms that you use to listen to the previous interviews we've done with these gents and all the others, and it's over 60 now, so please go and visit us on the platform of your choice and follow Investing matters on LinkedIn, or on Twitter/X.
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So thank you all to them and also the London South East and the Investing Matters team. Until next time, take care and god bless you all.
London South East 50:46
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