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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.
Hello, and a very warm welcome to the latest edition of "Insight Talks," a
monthly Trinity Bridge podcast. I'm James Tulloch, and I'm joined this month for
a first podcast appearance by fund manager Richard Stroud. Richard, welcome.
Great to see you.
Thanks, James. Great to be here.
And we're also joined by regular podcast contributor, investment officer
Isabelle Albarran. Isabelle, a very warm welcome to you as well.
Thank you so much. It's great to be back.
Great to see you again. Okay. We'll dive straight into market
performance then, Richard. We're recording slightly later in the month than we
usually do, partly because there's been some notable developments already in the
month of June. So we'll try and bring things right up to date.
And despite a little bit of a pullback from the highs reached early in
June, equity market performance continues to suggest that investors are
currently more excited about the artificial intelligence, or AI, infrastructure
boom than worried about the Iran war and the disruption that we have seen
there. Do you think that would be fair?
Yes. At present, that does seem to be the case.
But what is also clear is that investors are keeping tabs on longer term bond
yields.
Mm.
And that's because higher inflation and interest rate hikes are potential
consequences of the conflict in the Middle East.
Mm-hmm.
But just to put the AI-driven market advance into context, the tech sector
collectively amounted to around 30% of global equity market
cap in January. And this 30% group delivered
around 60% of the total return from global equities for the calendar
year as we entered June.
Mm.
So even in Europe, fully half of the equity market's performance has been derived
from tech, even though it's only around 7% of the market cap.
Right.
And what we've therefore seen is that many indices have continued to make new
all-time highs.
Okay. And what do we think could perhaps derail that, if anything?
Yeah, sure. So I guess one factor would be higher energy costs.
So this could, in theory, compromise the AI CapEx boom.
Mm-hmm.
And then if you think as well, if that inflation broadens out, that could force up
interest rates and constrain financing.
So we continue to see market pullbacks and volatility for these
reasons. But that being said, if we take a step back, earnings per
share growth looks very healthy for the S&P 500 this year.
Mm-hmm.
With also increasing visibility into 2027.
So if we have AI turbocharging growth at the company level and
geopolitical tensions cooling at the macro level, a tech-led rally
could persist before company earnings diffuse more broadly through the global
economy.
Mm.
And indeed, we saw this play out this morning on the back of an agreement between
the US and Iran last night.
Mm.
So that's to halt the war and to reopen the Strait of Hormuz.
So overnight, we saw semiconductor related names rally in Asia,
and that was while sovereign bond yields and the oil price fell.
And that's a similar theme to morning trading that we've seen so far in Europe.
Mm. Yes, indeed. I think we touched on that in the last podcast.
It's not purely hype driving share prices higher, as you allude to, earnings
per share estimates continue to see upward revisions, which more than keep pace
with share price rises. But we've certainly seen no shortage of
hype around the prospect the likes of SpaceX, Anthropic, and
OpenAI listing their shares publicly at some point this year.
And indeed, SpaceX did list to much fanfare last Friday.
We're recording on Monday the 15th of June.
And Richard, when one looks at the sort of headline numbers around what these
companies might be valued at, they're pretty mind-boggling.
SpaceX was seeking a public listing at something approaching a $1.75
trillion valuation, and its shares immediately started trading
somewhat higher than the $135 per share estimate.
And then if we think about Anthropic, they filed papers for a listing
a few weeks back, and its most recent capital raise valued the company at around
$965 billion, which is around two and a
half times higher than
was thought as recently as February.
So the first obvious question, I think, is are such valuations
justified?
So public listings should help us find out, in theory.
Mm.
So if you think, these companies are shifting from private structures
to listed share prices, where management will speak to public markets at least four
times a year when they report results.
So what this means is that investors will be able to delve into the details, so
everything from revenues to profitability and the health of the balance sheet.
So this should help fill in some of the gaps in investors' knowledge that was
present while they were under private structures, and perhaps this will lead to
less speculative share price moves over time.
Mm-hmm.
So these companies, and more specifically here, OpenAI and Anthropic,
they are at the vanguard of the AI revolution in that they're producing the models
through which end users will access and interact with artificial
intelligence.
Yes.
So greater transparency here should give a much better insight into whether there
is ultimately the demand, either now or in the future,
to justify the levels of CapEx that we're seeing across the whole AI network.
Okay. Interesting. And I guess the other obvious question
at the outset is sort of what does the scale of these listings mean for
markets and the indices that the companies will ultimately go into?
Are passive investors now going to have a significantly greater or even
greater outsized position exposure to
AI related US tech?
Sure. That's a very good point, because the mechanics of how these indices are put
together is really important here.
So first of all, there are specific constraints that some indices implement.
So if you take the S&P 500, for example, there are rules here around
profitability for inclusion into the index.
Mm.
And more importantly, companies have to float a sufficient proportion of the
overall value of the company in order to gain entry into these key
indices.
Okay.
So taking a step back, a typical company will only make 10% to
25% of its shares available to the public when it
IPOs.
So if we think about SpaceX here, the free float at its IPO was only
4.3%.
Right.
So that means that of the company's total outstanding shares,
only a small fraction has been made available for public trading.
So the vast majority still remains locked up by insiders,
executives, and early private investors.
Mm-hmm.
So a result of this is that despite the fact that these AI giants are looking at
one trillion plus valuations, the likes of SpaceX,
Anthropic, and OpenAI would not initially occupy a huge
proportion of the NASDAQ or the S&P 500, either
individually or collectively, were they to be admitted to these various
indices. So that is to say, the amount of disruption at an index
level is likely to be relatively limited initially.
Okay.
But the caveat here is that there has been some controversy, and
that's because index providers can pull certain levers to fit
a specific event.
Mm.
And in the case here, it is the listing of SpaceX.
So just back to the point about free float, some indices will amplify
the actual free float for index weighting purposes.
Mm-hmm.
So for example, the NASDAQ 100, this would apply a weighting multiplier
of three times to the actual float and treat that 4.3%
as 12.9% for the purpose of index weightings.
Okay.
So the issue here might come when price-agnostic passive index funds buy shares
to match the benchmark's weight. And that's because of the limited actual public
float, and this could create a liquidity strain, which in turn could lead to
price distortions.
Okay. All right. Lots to consider.
We'll pivot now, and look to bring in you, Isabel,
around some of the economic data we've seen.
Yes.
Because there's been a couple of key releases in recent weeks, which are really
important to note.
Firstly, US labor market data, which came in a little bit hotter than the
market was expecting, didn't it?
Yes, absolutely. So this was the May report.
And consensus saw an 88,000 increase-
Mm
... in non-farm payrolls, but actually, we saw
172,000, almost double.
And the March and April prints were also revised higher, significantly
so in the case of April.
Right.
Now, going back to what Richard was saying at the beginning, what the market
wants is rate cuts.
Mm-hmm.
They'll settle for flat rates and maybe even some
modest hiking, but stronger labor market
data implying sort of stronger economic
activity-
Mm
... and a greater risk of inflationary pressure is not what is
welcome at the moment.
Mm-hmm.
So, what is going on here? Well, going into the Iran war,
we had seen labor market cooling. We had sort of even
some concerns that the US labor market, and therefore the economy, was going to
cool too much.
Yeah.
And that's why we had those rate cuts coming out of the Fed.
Mm-hmm.
But now seeing these super strong payrolls, that's kind
of flipping the narrative in terms of what we can expect from the Fed.
Right.
And I think there are a couple of things that could be supporting the labor market
data. One of them is the fact that we've had a bumpy year for tax
refunds.
Mm.
I think on average, households have an extra $350
compared to 2025.
Mm-hmm.
That has given a significant boost to what we've seen
in terms of consumer-facing sectors, so retail,
leisure, hospitality, entertainment.
Mm.
All of those have been performing better in terms of the
jobs that they're adding.
And then another one is the AI investment boom.
So in terms of labor demand in construction,
in transport, and utilities, we're seeing a lot more
resilience there. The flip side is that some of
these sort of helpful trends are either running
out of steam or have a kind of another side to them.
Mm.
So staying on that AI one, yes, we're seeing more
activity in terms of construction.
But if we look at things like financial services
or even indeed sort of the technology sector itself, the payroll
trends there have not been as positive.
Right.
And then going back to those tax refunds, those are mostly now
claimed.
Mm.
That is kind of coming to an end.
Mm.
So that is happening at a point where we have these
higher energy prices, we have stronger inflation,
and wage growth is not really keeping up.
So we have a sort of negative real wage growth
trend as a kind of prospect that could weigh on activity.
Okay.
Now, a final thing to kind of complicate the picture further is that
we've had this more inflationary trend.
We have reasons why that might fade, but overall, we
have a slightly different picture in terms of balance of labor demand.
These sorts of employment growth numbers may not have been particularly
inflationary in the past, but we have a tighter labor market in the US for
immigration reasons as well.
Sure. Yeah.
So that's something that the Fed has to consider as well.
Okay. Yeah, and then on the inflation front, we had the latest US
inflation data released last week.
Annualized headline inflation to May came in at
4.2%, which was in line with expectations
and
up from the prior print of 3.8%. The Fed
will meet next in a few days' time later this week.
As I say, we're recording on Monday the 15th of June, and it will, of course, be
Kevin Warsh's first meeting as Fed Chair.
At the last meeting, the rate-setting Federal Open Markets Committee was
unusually divided, wasn't it? What do you think we can expect this time around?
Well, no change is expected at this meeting, but I think you're
right. The key thing is to try and get a flavor of what Chair Wash
is going to be like-
Mm
... and what his response is going to be.
So I'm going to be looking out for a few things.
First of all, what is the assessment of the economy in light of the strength
in payrolls that we have seen, balanced with the risk of negative income growth?
I'm going to be looking at the comment around the path of energy
policy, especially in light of events in the Strait of
Hormuz.
Mm-hmm. Yep.
And then lastly, I'm going to be looking at the dots.
So what does the dot plot tell us? This is
the diagram that illustrates where FOMC members
expect policy to be in the coming years.
Yeah.
As you mentioned, it has been very divided.
Does that remain the case? At the last time we got the dot
plot, it priced in cuts.
Mm-hmm.
Now obviously the futures market is indicating we should expect some
hiking. What do the dots tell us there?
Okay. All right. And then the other side of the pond in Europe,
we did of course have the European Central Bank implement a rate hike
themselves last week, the first hike from the ECB since
2023. Now,
when it came, it was more or less widely expected, but there have been some
suggestions amongst commentators that it might prove to be a
policy misstep. What's your take here?
Well, we saw 25 basis points, and some
arguably hawkish guidance pointing to further hikes to come.
Mm.
Although, obviously the official forward guidance is that everything is data
dependent.
I think the question here is, this gets to the
nub of the central banker's dilemma.
The central banker is hiking rates to ensure price
stability-
Mm-hmm
... to cool inflation.
Mm-hmm.
Hiking rates will not have an impact on the main driver of inflation at the
moment, which is energy prices, right?
Sure. Yeah. Okay.
What it will do is cool demand somewhat, and
cool inflation via that channel. At the same time, those
same energy prices will also be cooling demand.
Mm-hmm.
So is hiking rates an appropriate policy response?
Mm-hmm.
I think there is a reason to hike, and that is
the question of credibility and the commitment
to the price stability target. So if you can persuade
consumers
that you are serious about price stability and that
inflation is going to be at target, i.e.
2%, their own inflation expectations
will hopefully remain anchored at 2%-
Mm
... and that kind of does some of that work for you.
So I think that is why the ECB have made that
judgment.
Okay.
Yeah. And we'll sort of see if that works out.
Sure. Sure. Interesting.
Back here in the UK, of course, the latest inflation data, which is currently to
April, actually showed the rate of UK inflation slowing, although that's
expected to be temporary. The Bank of England's Monetary
Policy Committee also meet later this week.
Yes.
Rates have been held steady since December.
Is there any chance that the Bank of England could follow the ECB's lead, do you
think?
Well, forecasts and futures both indicate that no change is
expected at the June meeting.
Mm.
That has moved around a lot in terms of futures expectations,
certainly. At one point they were pricing in a hike,
I think June or July.
Mm.
That's now moved out to November or December.
And that central bank credibility question is arguably even
more relevant in the UK than in Europe.
That's partly because consumer inflation expectations are higher.
They rose in around 2022. We
had that inflationary spike following the pandemic and the beginning
of the war in Ukraine-
Mm-hmm
... and they've remained a bit uncomfortably high ever since.
Right.
So, in addition, sort of similarly to what we're seeing in the US,
data has been a bit stronger in the UK, and we've additionally
got questions about the Labor leadership.
Will we sort of see a more fiscally expansionary policy stance
coming in?
Mm.
All of those are not very helpful for the bank's price
stability mandate.
Sure, sure. What to make of all the political wrangling in the
UK since the results of the local and devolved parliament
elections just last month. We had more cabinet
resignations last week. We've got the key Makerfield
by-election coming up this week, so a very busy week for
news flow. Lots of unknowns still-
Mm
... Isabelle. But what about the market reaction?
How have gilt markets reacted since?
I think gilt markets have been digesting
two sets of news. They've been digesting global news, what is
happening in the Strait of Hormuz, and they've been digesting local
news, what is happening in Makerfield, and can Andy Burnham become
an MP? On the global side, bond yields globally have been
all over the place-
Mm
... based on the most recent tweets, or indeed in Trump's case, we're talking about
truths, I suppose. But the most recent move has been downward.
Yeah.
And that's good news for UK borrowing costs.
So we had over three hikes priced at one point for the UK-
Right
... and now that's kind of around one, maybe a little bit more.
Okay.
If we look on the local side,
if we can try and tease out the local effect
within those market moves, then the general direction for travel,
I would say, has been higher ever since Keir Starmer's position came
into question.
Mm.
And that is because, going back to Makerfield,
if Andy Burnham can become an MP, a leadership
challenge becomes almost inevitable-
Mm
... and he,
polling would suggest, is very likely to win that.
Yes.
So from a policy perspective, well, what does that mean?
It means you almost certainly have more borrowing
So there is a bond impact there.
Mm-hmm.
But also, if you're borrowing and then spending
that, that has a relatively high fiscal multiplier.
Mm.
So we should expect stronger activity, and that has an impact on
inflation as well. So I think that explains some of the bond
market response that we've seen.
Okay. Sure. Richard, it'd be interesting to get your take here as well.
As Isabelle touched on, gilt yields had been a good bit higher
in the immediate aftermath of the elections.
But whilst the sort of political uncertainty is an unwelcome distraction, the UK's
broader fiscal position is going to present a challenge to whoever happens to
be in government or leading the government.
So how does that sort of affect the way you might view gilts as from
an investment and portfolio construction perspective?
Yeah, sure. So that's exactly right, James.
So we have seen investors start to fret about a more left-leaning and
fiscally relaxed government that may emerge.
Mm.
And the result is that gilt yields have marched higher, as Isabelle touched on.
So the 10-year yield in recent weeks has topped 5.17%,
and the 30-year yield at 5.85. So if you think the
government's own independent economic forecaster, so this is the Office for Budget
Responsibility, or the OBR, as you may have heard in the press, so they may
have to bake these higher yields into its projections if they persist for much
longer. So with the 10-year gilt yield rising from 4.2% before the
Iran war, today every 0.5% increase will cost
roughly £6 billion more in annual debt interest
payments by the end of the decade.
Mm.
And the UK's relatively high proportion of index linked debt in
issue, so this is roughly 25% compared to 7% for the US, for
example. This only compounds the issue further.
And if you think about foreign buyers of UK gilts as well, so the prolonged
political uncertainty obviously isn't good.
Mm-hmm.
They currently own around a third of UK debt and may demand a still higher
yield as compensation should this uncertainty not alleviate in the near
future.
But the caveat here is that for domestic investors,
5% plus gilt yields, and this is being driven by higher risk premiums being
baked in, these may paradoxically offer some protection in
uncertain times.
Mm.
Particularly if global economic activity were to slow markedly as a
result of the ongoing conflict in the Middle East.
Mm-hmm. Okay, and then sort of thinking more about portfolio protection in
uncertain times, within alternatives, gold has been one of
our favored diversifiers for a while.
And recent news flows actually suggested that gold has now actually replaced US
Treasuries as the world's top reserve asset.
But the price of gold has steadily fallen back since the outbreak of the Iran
war, to around $4,200 an ounce
now. What's your sort of latest thinking here?
Are you comfortable retaining gold as a key allocation within
alternatives at the moment?
Yeah. So gold has indeed replaced US Treasuries as the world's top reserve
asset.
Mm.
And that's according to the ECB. So the move is partly explained by gold's rapid
price rise in recent years. So this has increased its relative share in foreign
reserve assets. So if we think at the end of last year, the ECB
estimated that the share of gold in foreign reserves, that's increased to
27%, and that surpassed US Treasuries at
22%, other US dollar reserves at 20, and the euro
at 15%. And I think it's interesting to think that back in
2023, gold was actually the smallest asset in percentage terms in
foreign reserves. So that's-
Right
... quite a rapid change that's taken place.
Sure.
And I think if we take a step back to think what's driven that price
action in gold. So we've seen greater demand from increasing
geopolitical risk, and we also know that central bank buying in recent
years has been particularly strong versus history.
Mm.
But the report also considers the specific limitations of the gold price
compared to major currencies. So for example, if you think about volatility,
the lack of liquidity, and also storage costs.
Mm.
And I think other points to note here are that purchases of gold did
decrease in 2025 compared to previous years.
And since the Middle East war, we have seen some central banks selling
gold to defend their currencies and also to finance
higher energy import costs.
Mm-hmm.
But that being said, the bigger picture from a longer term portfolio construction
point of view is that we very much continue to like gold as a
diversifier, particularly considering the post 2020 inflationary
backdrop.
Okay. Fascinating. Richard, thanks very much indeed for your insights.
Great to get your thoughts.
Thanks, James.
And Isabelle, thank you very much indeed for your input as well.
Fascinating as ever.
Thank you very much.
And a very big thank you to everyone for listening to the podcast.
I do hope you found it informative.
Your support is greatly appreciated as ever.
We'll of course return to do it again next month.
But in the meantime,
if you'd like more information, please do visit the insight section of our website
at trinitybridge.com. But for the time being, thank you very much and
goodbye.