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This month, James Tulloch is joined by Richard Stroud and Roohi Siddiqui to discuss the recent US-Iran agreement, easing energy market pressures and the implications for inflation, interest rates and economic growth. The episode also explores AI-related market volatility, consumer adoption trends and what the future may hold for AI monetisation.
The team examine recent Federal Reserve and Bank of England rate decisions, UK political developments and the continuing resilience of the US consumer.
This podcast is brought to you by TrinityBridge – trinitybridge.com – and features James Tulloch, Head of Investment Specialists in conversation with Richard Stroud, Fund Manager, and Roohi Siddiqui, Head of Equity Research.
We’ve created this podcast to set out possible approaches. Please do not view it as financial advice, or its content as investment recommendations. Just because an investment or an investment strategy has performed well in the past, it does not mean it will continue to do so. Our predictions are based on information that is currently available, however events and markets can and do change rapidly.
Creators and Guests
What is Insight Talks?
Our in-house experts share our views on the current market conditions facing investors. Brought to you by TrinityBridge.
We've created this podcast to set out possible approaches. Please do not view it as financial advice or its content as investment recommendations. Just because an investment or an investment strategy has performed well in the past does not mean that it will continue to do so. Our predictions are based on information that is currently available. However, events and markets can and do change rapidly.
Speaker 2:Hello, and a very warm welcome to the latest edition of the Insight Talks podcast from Trinity Bridge. I'm James Tulloch, and I'm joined once again this month by fund manager, Richard Stroud. Richard, welcome. Great to see you again.
Speaker 3:Thanks, James. Great to see you.
Speaker 2:And we're also joined this month by Roohi Siddiqui, Head of Equity Research here at Trinity Bridge. Roohi, a very warm welcome to you too.
Speaker 4:Thank you, James. Great to be here.
Speaker 2:Okay. Loads to get through as ever. So let's get straight into it then, Richard. We spoke last just as the deal between The US and Iran emerged mid June. Indeed, I think the news broke on the day that we recorded the last podcast.
Speaker 2:So the two countries have signed a memorandum of understanding which provides a framework of further negotiations. How significant a step do we think this is? And assuming that the deal holds, how quickly can we expect the flow of traffic through the Strait Of Hormuz to get back to anything like normal?
Speaker 3:Yeah. So over three months after the outbreak of facilities in The Middle East, The US and Iran have agreed to a framework deal to bring an end to the confrontation and to open the Strait Of Hormuz. So that's obviously a key transport route for oil, liquefied natural gas, also known as LNG and other commodities. So around 20% of global oil makes its way through the Strait Of Hormuz. So as you say, the two nations have signed a memorandum of understanding, also known as an MOU.
Speaker 3:So what this looks like is it's a 14 agreement, and it provides a framework for negotiations.
Speaker 2:Mhmm.
Speaker 3:So as you say, James, all military operations are meant to cease, and we have a $300,000,000,000 reconstruction program for Iran and also the removal of all US sanctions. All of these things are on the table. However, reaching a lasting agreement over Iran's nuclear program and its broader regional security issues, these are likely to remain fundamental to any final settlement. Sure. So things won't go back to how they were overnight, but we're certainly making moves in the right direction.
Speaker 2:Okay. Okay. And I think I think what's perhaps surprised many observers has been just how quickly that the oil price has dropped back to pre war levels. Perhaps you could explain a little bit why that might be because, you know, less than two months ago when the confrontation was very much front of mind, there were concerns that we would experience oil shortages, airlines are warning of flights being cancelled because of a lack of jet fuel, but such concerns seem to have evaporated pretty quickly despite the fact that Strait was closed for a prolonged period and it will take obviously some time for things to get back to anything anything like normal.
Speaker 3:Sure. So just to put some detail around this. So oil prices peaked on the March 31. And since then, we've seen a decline to near pre conflict levels seen earlier this year. So almost as though the conflict didn't happen.
Speaker 3:So we think there are four or five key reasons for this move. So firstly, the oil price is swayed by the futures market. So the inventory situation today isn't as relevant for investors as future periods are. So as you say, although there were concerns around near term inventory levels, the peace agreement came sufficiently quickly enough for the supply demand balance to look a lot less stressed in the coming months now that the strait has reopened.
Speaker 2:Okay.
Speaker 3:Second point is that energy infrastructure in The Middle East wasn't badly damaged in the conflict. So this the largest single point of damage was to Qatar's main LNG processing facility. So that will take several years to rebuild.
Speaker 2:Right.
Speaker 3:But excluding this, there wasn't really a large chunk of supply taken offline that needs to be fixed over the coming years. Third point, so this has to do with strategic reserve releases. So this has cushioned the blow. So we've had about a total of 10% of OECD inventories come to market. This was set to wind down in July.
Speaker 3:So in light of my first point on the futures markets, this did put some urgency on making a deal when it did finally happen.
Speaker 2:Okay.
Speaker 3:Moving on to the fourth point and related to number three, but it's China. So this was able to reduce its immediate dependence on shipments through The Strait, and that's because it spent the past eighteen months building its stockpiles of strategic reserves.
Speaker 2:Mhmm.
Speaker 3:So if you think that China is the world's largest oil importer, this was very helpful in releasing the extra supply to elsewhere in the world. And just as the last point, if you think about where we were before the conflict, oil was oversupplied as we headed into the conflict
Speaker 2:in The
Speaker 3:Middle East.
Speaker 2:Mhmm.
Speaker 3:So we saw quite a steady decline in oil prices through calendar 2025. And just further on this point, we've seen The UAE quitting OPEC. So there's there's some uncertainty around the future of the alliance as well. Sure.
Speaker 2:And, Roohi, it'd be great to get your take here. Assuming the current situation holds, then presumably there should be a strong tailwind to growth without rising oil prices and rising headline inflation, then the uncertainty and concern hanging over consumer spending is presumably lifted somewhat.
Speaker 4:So James, unsurprisingly, we saw a deterioration in consumer confidence in The UK, The US and Europe directly following the Middle East conflict. And that's largely due to worries about increasing energy prices and the potential knock on impacts on inflation being higher for longer and also higher for longer interest rates. Now, since the conflict resolution, the good news is that we've seen a small tick up in consumer confidence. I think there's definitely scope for further improvement as the year progresses. Of course, some of that might be the World Cup fever as well at present.
Speaker 4:Yes. From here, with headline inflation falling and greater confidence that rates aren't going up, we could see consumer spending continue to recover from here into the second half.
Speaker 2:Mhmm.
Speaker 4:That's good news. We just need employment to continue to hang in there for the time being as well.
Speaker 2:Okay. Okay. And And on the subject of monetary policy, Richard, I think since we last spoke, we've had interest rate decisions from both the Federal Reserve and the Bank of England with both opting to keep rates on hold. But despite the sort of changed dynamic in the background, markets are still pricing in rate hikes to some degree in The US and The UK in 2026. Would that be your expectation as well or do you expect the pressure to hike rates to now further fade?
Speaker 2:Yes. So we think the chance of rate hikes are certainly reduced
Speaker 3:on the developments in The Middle East. So if we just start with the Fed. So this was Kevin Walsh's first meeting as chair, and it concluded with no change in interest rates, as you say. So these remained in a range of 3.5 to 3.75%. But there was somewhat more of a hawkish tone, which pointed towards possible rate hikes.
Speaker 3:Yeah. So it seems that the inflation surge is still causing a headache for policymakers. And when we look at the Fed's accompanying statement, there was a key removal of language indicating a bias towards future rate cuts
Speaker 2:Yes.
Speaker 3:Which was very notable. Yeah. And just on the dot plot grid, so Fed officials have also removed the prior outlook for a rate cut this year. So several policymakers are now projecting an increase later in 2026. And I think interestingly as well, so Walsh did not make a dot plot submission himself, and we know that he's been a critic of the tool and also forward guidance more generally.
Speaker 3:Mhmm.
Speaker 4:Mhmm.
Speaker 3:So we can expect a review of the Fed's communication strategy and other key practices in the coming months. But I guess the caveat to this hawkish tone is that Walsh has previously noted that policymakers should look past supply induced inflation shocks, and he's also suggested that productivity gains from artificial intelligence will ultimately have a disinflationary impact over the longer term.
Speaker 4:Mhmm.
Speaker 2:Indeed. Yeah. And on the inflation front, we have had the the latest US data to digest recently as well. So that was the the personal consumption Expenditures or PCE price index, which is the Fed's preferred measure of inflation. And despite reaching its highest level since April 2023, the print was broadly in line with expectations and therefore didn't indicate a sharper than expected acceleration in prices, did it?
Speaker 3:No. It didn't. So the PCE index, this rose to an annual rate of inflation of 4.1% in the twelve months through May. So this is the highest reading since April 2023. And then just turning to core PCE inflation, so that's excluding the more volatile food and energy prices.
Speaker 2:Mhmm.
Speaker 3:This rose at a 3.4% annual rate, and this was the highest since October 2023. So while this sounds high versus recent history, as you say, James, it did not indicate a sharper than expected acceleration in prices. And now we have energy prices at lower levels as we've discussed. So the case for looking through short term spikes in inflation has certainly strengthened.
Speaker 2:Yeah. Sure. And and what about the jobs picture, Richard?
Speaker 3:Yeah, sure. So just on the labor market, so this has generally been resilient. So that's perhaps tilted policymakers more towards rate hikes in the face of inflationary pressures. But if we just look at the latest data release for June, so this was slightly weaker than expected, which is further easing rate hike concerns. So The US economy added 57,000 jobs in June.
Speaker 3:That was around half the consensus forecast, and we also had some downward revisions for April and May. So I guess one positive from the report was the unemployment rate fell to 4.2% from 4.3%.
Speaker 2:Mhmm.
Speaker 3:But this was more to do with a shrinking workforce with more retirees rather than increased hiring. Mhmm. But overall, this release was more of a slight calling than any pronounced slowdown. And I think the bigger picture here is very much one of a resilient US economy and a US labor market.
Speaker 2:Sure. And really, consumers, this should be a positive as we've discussed. And despite the energy price shock, we have actually seen US consumer spending accelerating ahead of the rate of inflation just just recently. Resilient jobs data should be supportive as well. What was the latest you're seeing in terms of the so called K shaped consumer trend, which is a notion that there's an ever widening gap between higher income households and lower income households?
Speaker 4:So James, consumer spending in The US has been very solid. You can see that in credit card data, and that's been driven in particular by the higher income consumer. As you highlight, the upper part of the k shape, and that's been benefiting the experiential and luxury sectors of the economy. Remember, close to 50%, five zero, of the retail spend in The US is coming from the top 10% of household income.
Speaker 2:Right.
Speaker 4:And with stock markets up this year, that's just going to further amplify the wealth effect and make the K wider.
Speaker 2:Okay, interesting. Interesting. And Richard, if we turn our attention domestically, the Bank of England also held rates at the last monetary policy committee meeting as we've said. What was there to deduce from from the output there?
Speaker 3:Yep. So the Bank of England, they held The UK interest rates at 3.75% and that's the fourth meeting in a row in which rates have been left unchanged. And similar to The US, the latest inflation print came in below consensus. So we had CPI printing 2.8%. That was against expectations at 3%.
Speaker 3:But I guess there are two quite important distinctions to make between The UK and The US in terms of monetary policy. So firstly, The UK's labor market can't really be described as resilient in the same way as The US can. Right. And secondly, The UK is more linked into global energy prices than The US is. Sure.
Speaker 3:So the implication is that the Bank of England might be quicker to consider rate cuts if energy prices did remain low from here.
Speaker 2:Okay. Okay. And sticking with the domestic picture, we spoke last time about the prospect of a challenge to UK Prime Minister, Kirstjarma, from Andy Burnham after the Makerfield by election. Now Burnham duly won the election to ignite his campaign to succeed Starman, but in the end Starman announced his intention to step aside and it now appears that Burnham will enter number 10 unopposed by any other Labour MP for the party leadership. Now, a more orderly transition of power might be a positive near term, but there remains a multitude of issues facing Burnham or any potential Prime Minister when they take office, doesn't there?
Speaker 3:Sure. So Burnham, as you say, secured a comprehensive victory in the Makerfield by election, and he now seems set to become Britain's seventh prime minister in the past decade. So as we've noted in the past, Burnham has sought to downplay previous comments around being in hock to the bond markets. And he has suggested he would retain the current government's fiscal rules during the by election campaign. But then you have to consider the the fact that spending on debt interest, public services, and welfare all increased compared with May last year, outweighing higher tax receipts.
Speaker 2:Right.
Speaker 3:So the reality is that the room for maneuver remains tight for any would be prime minister or chancellor. Mhmm. So in terms of the immediate market impact, The UK's borrowing costs climbed a little after the result. But at around 4.8%, the ten year guilt yield is still some way below the 5.17% peak in mid May.
Speaker 2:Yes.
Speaker 3:So it's fair to say the markets are relatively calm for now. But as you say, a quick and orderly handover of power may well be a positive in the near term, but tough decisions do lay ahead and much obviously depends on who Berner might appoint as chancellor of the Exchequer.
Speaker 2:Yeah, indeed. Okay. Of course, the other major theme dominating the market narrative in recent weeks has been another bout of AI related market volatility. Now such market moves shouldn't be considered too unusual in the general ebb and flow of things, but it's notable perhaps that this latest bout of volatility wasn't really on the back of any specific or meaningful news flow, but rather I think it reflects the level of investor concern which exists around the sustainability of AI related capital expenditure and ultimately the returns that that might lead to. Do you think do you think that would be fair?
Speaker 3:Yeah. I think it's fair to say that investors are increasingly focused on whether the large and growing levels of data center capital expenditure, whether they will generate sufficiently meaningful returns to justify the spend in the first place. Just to be clear here, there is uncertainty over the extent to which AI will revolutionize ways of working and improve productivity. So the ultimate scale of end user demand and speed of AI adoption, these are also uncertain factors. So very small changes in assumptions on what the future might look like, these can have outsized impacts on the value of the assets today related to the AI build out.
Speaker 3:But there are two key points that we do know today. So firstly, only around 0.5% of the global population are paying for an AI subscription, and that's already causing huge bottlenecks across the value chain. And the second point is that AI models are getting better. So that implies that monetization is becoming more straightforward and easier to justify. Sure.
Speaker 3:So we have to remember as well that the share price performance in some of these companies has been exceptionally strong year to date. Mhmm. So the sell off has showed up most notably in those benchmarks, which are heavily weighted towards technology. So if we take the Korean KOSPI index, for example, so this is half weighted in memory chip exposure, and this is one that has fallen notably. Yeah.
Speaker 3:But then if you take a step back on a year to date basis, the KOSPI is up over a 110%. That's year to date. Yeah. Yeah. So we have seen some of this being given back.
Speaker 2:Okay. Yeah. Absolutely. And, Roohi, on on the subject of AI and the wider end user take up or or levels of demand, So what are the latest trends you're seeing in terms of consumer adoption? Is this something that consumer has shown a willingness to embrace?
Speaker 4:That's a great question. Consumer AI adoption is already widespread and increasing, And the surveys today are showing that more than three quarters of consumers across The US, Europe, and China are using at least one AI product.
Speaker 2:Right.
Speaker 4:And some are using multiple tools. Now the tools they're using depends, of course, on what is available by market. The data is also showing that the frequency of usage is is high. So about a quarter of people are using AI on a daily basis. About half are using it at least once a month.
Speaker 4:And what we see is that the regions with the highest frequency of use, surprise surprise, look to be China and The US. I was really intrigued by the stat that Richard gave earlier that only around half a percent of the global population are paying for an AI subscription today. Mhmm. And and that's exactly in line with what I'm seeing. A while back, OpenAI said that only 6% of its global customer base are paid users, and that's likely skewed by some emerging markets that are on the free version, by the way.
Speaker 4:But even in developed markets like The US and Europe, three quarters of consumers are likely on the free version. And when we look at The US, the households that are paying for AI services, well, they skew higher income and they're younger, so that's not surprising. Mhmm. But it's still only a very, very small proportion. But all of this is quite interesting because it suggests there could be a significant long term opportunity for AI companies to monetize some of these consumers over time.
Speaker 2:Right. Okay. And how exactly are consumers using AI today? And what about the consumer take up of or use of agentic AI? So AI that actually does stuff rather than just simply answering prompts like complex training or travel agency virtual assistant output, for example.
Speaker 4:Well, consumers are using AI today for things like you would expect, search, learning, research, as well as, you know, summarizing and creating documents, rewriting things. So the traditional productivity tasks. But people are also using AI to shop for tech, the latest gadgets, to plan holidays, to look up recipes, surprisingly enough. For agentic AI, it's really early days. So in terms of both awareness and usage, that's the case.
Speaker 4:Really, really early days.
Speaker 3:Right.
Speaker 4:Survey data is suggesting that more more than two thirds of US consumers have not even heard of AgenTik AI. And then for those who are aware of AgenTik AI, adoption interest is pretty low at present and there is also some scepticism about the potential benefits.
Speaker 2:Okay. Okay. What is holding things back here? What are the major concerns that consumers have?
Speaker 4:Yeah. Consumer interest in adopting agentic AI looks to be really low, and that's because of worries around societal harm Mhmm. Trust, privacy concerns. And also, the consumers are worried that AI could be more harmful than beneficial to society with the potential to cause large scale job losses. Most people feel that there is need for human oversight over AI.
Speaker 4:Yeah. And then to the the point around hallucinations, AI can just get things plain wrong. And so there's this need to verify whatever AI is telling you. The implication from from all of this is that consumers today aren't that comfortable delegating real world decisions or transactions that will involve ultimately their hard earned cash
Speaker 3:Yes.
Speaker 4:To autonomous agents. Right? So we need these issues to be addressed over time to get more consumers onto the agentic AI journey.
Speaker 2:Okay. Alright. Fascinating to watch it play out. We'll have to leave things there really, but I'm sure we'll revisit the topic again in the not too distant future. But for now, thank you very much indeed.
Speaker 4:Thank you, James.
Speaker 2:And Richard, thank you very much indeed for your input as well. Great to get your thoughts as ever.
Speaker 3:Thank you, James.
Speaker 2:And thank you very much indeed to everyone for listening to the podcast. Your support as ever is greatly appreciated. We will, of course, return to do it again next month. But as always, if you'd like more information in the meantime, please do feel free to visit the insights section of our website trinitybridge.com. But for now, thank you and goodbye.