Seminar 2022

Please note, opinions expressed may be personal and not representative of KMG and should be considered as opinions only, and not as specific advice.

Videos

Welcome Intro

AI Film

Julian Jessop Presentation

Q&A Session - we strongly recommend that you watch this video as there is significant difference of opinion between Patrick and Julian as well as some of the questions asked by the audience

Notes from the KMG Seminar held at Denbies on 28th September 2022, including slides and film

Patrick McIntosh – Necessity is the mother of all invention

• This seminar is all about change.
• Lots of key worries. We need to think through the short-term issues and concentrate on the more strategic issues of where the world is going. 
• The fundamental problem is politics. Our new government was undemocratically voted in by a very small proportion of the populace.
• The 2, 10 and 30 year interest rates for UK Treasuries are not significantly different to the US Treasury rates indicating that it doesn’t cost a lot more to borrow in the UK than it does in the US. 
• There has been far too much money in the system which has allowed inflation to take off.
• Sterling is weak against the dollar but not so bad against the Euro.
• Interest rates in the UK are likely to go up more than other countries probably to about 5% before falling back.
• Taking out energy and food, underlying inflation around the developed world is about 6% which is a worry for governments and Central Banks.
• The cost of energy is positive long term, as the World either reduces usage or moves to other sources. The infrastructure spend around the world to decarbonise is huge. The world now generates about 10% of its energy from wind and solar from its position 10 years ago when it was virtually non-existent, and we are investing in infrastructure.
• Our investment portfolios are globally based, and ironically sterling weakness is good for them.
• There are likely to be flu epidemics this winter as we have been cocooned for the last couple of winters thanks to Covid. Covid has also not gone away.
• On a positive note, the future always turns out better than expected. 
• Change is positive and inevitable, which our investment portfolios are constantly embracing.
• AI shows the potential future of the world in all sorts of ways.
• Michael Mosley, as an example, is transformational in how we live our lives, Europe now has 90% of its energy needs available, shipping and commodity prices are coming down, inflation has probably peaked for most of the world.
• A health update on Jenna: She is recovering well from a bleed on the brain and a stroke. She is expected to make a full recovery and be back to work probably in the new year.
• Patrick and Nick completed their cycle challenge and have raised over £5,000 for Maggie’s Charity.

Sanlam Global Artificial Intelligence Film

The film related the history of how AI has developed and its application, but tools need to be used in the right way to be of use.

Julian Jessop – Economic Overview

• It is more important to have a global view rather than just what is happening in the UK.
• Stagflation is stagnant economic growth and inflation. Consumer confidence is low, and activity is losing momentum alongside high inflation caused by higher prices and very loose monetary policy. 
• The difference this time is that labour markets are very tight, and unemployment is very low. This indicates a shortage of workers which is a problem, but it is a comfort for people in work.
• We mustn’t forget that Covid is not over in the UK or the rest of the world. It is a persistent threat.
• Demographics are a huge challenge for health and social care particularly across Western Europe and in China to a degree now. It is less of a problem in India and Africa. A good example of where the story is different depending on where you live.
• Geopolitical risks are always with us but there are some big ones around now.
• Many of us didn’t appreciate how important Ukraine was in the production of fertiliser, amongst other things. Fertiliser prices have shot up which has led to higher food prices. It is also a huge exporter of wheat. This has a bigger impact on poorer people around the world.
• We have been most affected by the energy prices. Gas storage of anything less than a 30% stock level is a danger. If we have a normal winter, we should be ok as stock levels have been built up in preparation. If consumption reduces, we will have no problems but may have issues if we have a cold winter.
• The US: The Fed has been the most aggressive of all the central banks and the expectation of interest rates next year is about 4.5%. The dollar has been the strongest currency due to these interest rate rises but also the US has been less affected by the energy crisis and the dollar is considered a safe haven currency. It is not just sterling that is weak against the dollar.
• China: There are structural problems in China including in housing and elevated levels of corporate debt. It is a state-controlled economy though, so Chinese banks will continue to do as they are told and there won’t be a big boom bust that you might see in the west.
• Europe: Europe is doing no better than the UK, the sickest economy in Europe is not the UK but Germany.
• Trussonomics: There is an overwhelming emphasis on economic growth. They are not worrying about short-term borrowing but more about the longer-term sustainability of the public liabilities particularly the debt to GDP ratio. They are being decisive not dithering and doing things for the economy even if unpopular.
• Looking at the value of the pound against a trade weighted basket of other currencies it has been pretty stable over the last few years. We shouldn’t panic about the value of the pound as it does create some winners.
• It is bond yields we should be more interested in. UK bond yields have gone up by 2% in one month, more than twice as much as any other country. This is unprecedented and has never happened before. It means the cost of government borrowing is higher, but it also spreads through the rest of the economy. The BoE has intervened again to protect the bond market in the short term, and the pension market in particular.
• The UK: Inflation is broadly spread with underlying inflation at 6% once you strip out energy and food. The number of people in payroll employment is at record highs. If you include self employed and those not on a payroll the number is much lower and no higher than pre pandemic due to people choosing not to go back to work. This creates a problem on the labour supply side. A positive though is that household balance sheets are pretty healthy in higher and middle income families. 
• UK interest rates should be roughly the same as the nominal growth rate of the economy. Julian’s guess is that they are heading for 4%.
• To conclude, the global economy is fragile, but we should avoid a deep recession. Monetary policy is a worry, but interest rates should settle at a low level by historic standards. A lot of bad news is already priced in, and we must give Trussonomics time to work but they must be better with their communication.

Presentation materials