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This month, James and Giles discuss global equity trends for June which delivered some surprises considering recent geopolitical tensions and tariff uncertainty (1:10). Our experts consider potential rate cuts from the Fed later this year, after we saw subdued inflation and a weakening dollar in the US in June (2:30).
James and Giles shift their focus to the impact – or lack thereof – of a turbulent Middle East upon global markets (5:06). Markets largely shrugged off the brief Israel-Iran conflict we saw in June, with oil prices spiking temporarily but stabilising following a ceasefire brokered by the US.
Looking at home shores, we dive into the UK government’s Spending Review which revealed modest increases for health, education and defence, but cuts elsewhere (6:55) and look ahead to what might happen in the Autumn budget later this year.
Finally, Jon and James discuss the growing interest in private market assets and explore historical performance, growing accessibility for investors, and the impact of changing market conditions on this sector (9:50).
This podcast is brought to you by TrinityBridge – trinitybridge.com – and features James Tulloch, Senior Investment Specialist, in conversation with Giles Parkinson, Head of Equities and special guest, Senior Equity Analyst, Jon Kirk.
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 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 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.
James Tulloch:Hello, and a very warm welcome to the July edition of the Insight Talks podcast with me, James Tulloch. And I'm joined as usual, as ever, by our head of equities here at Trinity Bridge, Giles Parkinson. Hello, Giles. Hey, James. And our guest this month is John Kirk, senior equity analyst here at Trinity Bridge.
James Tulloch:John, thank you very much indeed for joining us. Morning, James. Great to be here. Great to see you both. Thank you very much indeed for your time.
James Tulloch:As ever, an awful lot to cover over the next twenty minutes or so. John, we'll get into the weeds of the the subject of private market assets with with yourself shortly as that's seemingly an ever growing area of of interest, and and there's an awful lot that we can we can cover there. But first, we'll dive straight into events. Over the month of June, Giles, it obviously marked the end of the second quarter of twenty twenty five, and and it was a quarter which saw significant volatility as investors had to get a handle on uncertain tariff policy
Giles Parkinson:and escalating hostilities in The Middle East, unfortunately. But ultimately, Giles, in the absence of any notable weakening in the economic data, most major asset classes delivered positive returns over the quarter, and June really saw global equities continue to to to rally, you know, despite the fact that some indices had had hit almost bear market territory as recently as April. Yes. Quite James. What a turnaround.
Giles Parkinson:I think the backdrop here is this shift in terms of market regime to what I'm terming a soft landing reboot. What does that mean? Inflation data has been really supportive in a month. It suggested that Donald Trump's sweeping tariffs have thus far only had limited impact on the headline print. So for the most recent month, that CPI index, consumer price inflation index rate rose to 2.4% in May.
Giles Parkinson:Mhmm. That was a figure that was released in June. That was up from 2.3 recorded in April, but that 2.4 of May was below the 2.5% consensus expectation. So tick in the box there, cold inflation print. And so with inflation remaining relatively subdued, investors increasingly focusing their attention on when the US Federal Reserve are likely to resume cutting interest rates, cast their minds back, and the the Fed went on hold in December of last year.
James Tulloch:Yes.
Giles Parkinson:So look, there could be a notable uptick in inflationary pressures to come, that tariff impact continuing to feed through, But we have had tariffs in The US since February, and we're not seeing a big uptick. So this has allowed investors to really dial up expectations for when the next rate cut is going to come, and so far that's priced for September. So that's the inflation side of things, James, in terms of soft landing. On the labor market front, here another tick in the box, the latest figures for The US are strong at the headline level. Okay.
Giles Parkinson:The details within the print were slightly softer, but for that headline level, the so called non farm payrolls measure, month on month job increase in America, that was plus 139,000 in May, which is higher than the one two five the forecasters had looked for. The rate of unemployment held steady. However, that one three nine number, it was a step down from the one four seven in April, and here's here's a softness, James. The jobs added were concentrated into really just a few industries now. It's almost like the job creation in America has become increasingly narrow.
Giles Parkinson:You've got health care, leisure and hospitality, education. But for now, The US labor market continues to hold up. Okay. So with with with tariff inflation benign for the for the time being, and progress seemingly being made on on on tariff negotiations, well as
James Tulloch:that perhaps slight weakening in the labor market data, do we think that the US Federal Reserve perhaps has room to to start cutting interest rates again? President Trump has certainly been very vocal on the subject and made made his or continued to make his his feelings clear, aren't they?
Giles Parkinson:Yeah. Quite. So from sort of an economic point of view and monetary policy, yes, the Federal Reserve's path to interest rate cuts, perhaps starting in September, has appeared to widen in terms of the data that we've had over the last month. It's those reports of cooler inflation that I was mentioning just now, and also, job growth continues, but there are some underlying signs of softening within the labor market. So so far, the Fed looks on course to hold rates at their upcoming June meeting, but it does appear that there is now start to be scoped to begin cutting again.
Giles Parkinson:The Fed's latest projections continue to signal two cuts in 2025, and markets also continue to anticipate that the Fed will cut borrowing costs twice in 2025, so that's consistent there. First time in September, and once more in December. But back to your question, whether it's enough to placate President Trump, that's another matter.
James Tulloch:Yeah, sure. Okay, and of course, the month was also marked, unfortunately, by the escalation of hostilities in The Middle East. Now thankfully, seems tensions have de escalated as quickly as they flared up, but from an investor's perspective, Giles, markets largely shrugged off the the Israel Iran conflict, didn't they?
Giles Parkinson:Yeah. From a narrow financial market perspective, the context here is that the oil price had fallen over the last year. When Israel's initial attack on Iran hit the news wise, global oil prices began to spike. They surged some 7% on one day and continued to follow on. However, stepping back, that still only took the level and it's since fallen, so that was a peak level back to its January price.
Giles Parkinson:Now, it was and remains possible that Iran has the capacity, the capability to severely disrupt global oil supplies. They can target some shipping maritime lanes, critical pinch point comes close to the coast there, and roughly a quarter of the world's oil passes through. Now, if that were to happen, if there was significant damage caused to The Gulf's energy infrastructure, a sustained rise in oil prices is possible, and eventually that might ripple back to the wider economy. Yes. But in terms of closing these maritime shipping lanes, that would be a double edged sword for Iran.
Giles Parkinson:On the one hand, they would disrupt their own oil trade and source of income. On the other hand, it would likely incur the wrath of the Chinese, one of the major customers. Yep. So I think the markets have largely viewed the situation as a regional problem, rather than a pivotal flashpoint. Again, to recap the news in the last couple weeks, there was direct US military involvement, briefly threatened to bring about a more high stakes situation, but Donald Trump quickly sought to broker a ceasefire, declaring that The US strikes conducted had achieved their aims.
Giles Parkinson:And indeed, we've had a tentative ceasefires held from the June 25, and the oil price has fallen back.
James Tulloch:Yep. Okay. Okay. And then back home, Giles, in The UK, we saw the government unveil their spending review in June, setting the day to day budget of government departments for the next three years and investment budgets to the end of the decade. But our fiscal crunch point certainly appears to be looming, with ever greater focus now beginning to turn to the next autumn budget.
Giles Parkinson:Yeah, so there was little surprise in the spending review itself. Much of the essential content was pre trailed, and some headline growing announcements were made in the days prior. Look, stepping back, as you hinted, we've mentioned a number of times in this forum before that the chance is restricted in how much she can spend due to her self imposed fiscal rules. And these rules and to recap, this is that day to day spending should not be funded through borrowing, and that government debt should be falling as a percentage of GDP by '29 and 2030. Mhmm.
Giles Parkinson:Now, the government set it stalled on generating sufficient economic growth to keep these rules without hiking tax on earned income. However, just a day after the spending review, Reeves refused to rule out future tax rises after US economy was reported to have contracted by minus 0.3% in April. Different things fed into that, high business tax, higher household bills, large drop in the value of goods exported, thank you tariffs, are cited as reasons behind that drop. However, look, these monthly GDP figures, they're notoriously volatile, maybe a bit more stable on a three month moving average prints, the print to April showed growth of plus 0.7. Nevertheless, with spending plans set, many observers are increasingly of the opinion that additional tax hikes are going be required at the next budget in the autumn.
Giles Parkinson:Yeah, indeed. And other spending commitments made during the month,
James Tulloch:well as U turns on proposed cuts to welfare spending, really only served to increase the potential pressures building on on the chancellor, didn't they?
Giles Parkinson:Sadly, yes. So look, perhaps the most significant takeaway from a NATO summit during the month was a pledge amongst members to reach a 5% of GDP defense spending target within a decade. This is a significant leap from the current 2% guideline. Now that 5% is a total figure, so technically, it's made up of three and a half from sort of core defense spending and troops and weaponry. The other one and a half can be sort of cyber and resilience and infrastructure and so on.
Giles Parkinson:Now, what about The UK? Member of NATO. Early in the month, the UK government had outlined its strategic defense review, and prior to that, had already announced that The UK's defense budget was to rise from two and a half percent of GDP by 2027, with a target of 3% in the next parliament. So look, for the UK Treasury, further spending commitments are likely to add to already significant fiscal quandaries. As you say, James, the month also saw a government u-turn on proposed cuts to to disability benefits save off a rebellion by backbench MPs.
Giles Parkinson:Yeah. And they've already revised cuts to the winter fuel allowance. So, look, the Treasury won't be making the savings it was anticipating on those fronts. Mhmm. And given the chancellor's apparently non negotiable borrowing rules, it's become more difficult to see how the government might might avoid breaking its pledge not to hike income tax or employee National Insurance contributions come the autumn.
Giles Parkinson:Yeah, sure. Okay, we shall watch with interest, Giles, for the
James Tulloch:time being. Thank you very much indeed. Great to get your thoughts as ever. John, we'll bring you in at this point and turn to the topic of private market assets because it's something we tend to hear about and come across with ever greater frequency these days and potentially a very significant topic which could shape both institutional and retail investment strategies in years to come as those evolve according to conditions and accessibility. So perhaps let's start with the basics.
James Tulloch:To begin with, can you perhaps outline what private markets are and what it is that characterises them? Great, yeah,
Jon Kirk:thanks James. So private markets investing essentially means investing in securities that are not available on public markets, for example, the London Stock Exchange and so on, publicly listed shares and what have you. This is investing in private companies through, for example, private equity. It also invests involves investing in the bonds of private companies or even lending directly to private companies through so called private credit Mhmm. And those two are the private equity and private credit are by far and away the largest elements of private markets, but also there is infrastructure investing, that'd be anything from data centers through to sort of utility scale grids and things like that, a lot of transitional energy themes in that too, and real estate.
Jon Kirk:So it's a broad range of assets, but these are not typically being accessed by smaller investors up until now, it's been mostly institutions. Yeah. That is changing. Okay, okay,
James Tulloch:and then, of course, it's it has been possible to invest in publicly traded private equity firms for quite some time, and we've seen such private market stocks in both The US and Europe, particularly the likes of KKR, Blackstone Partners Group, for example. We've seen them, you know, outperform for for many years. Why do you think that is?
Jon Kirk:I think it it really boils down to one thing, really, which is that at the end of the day, they've grown their assets under management faster than public markets have. And the reason for that comes down to the fact that predominantly institutional investors up until now have been increasing their allocations to alternative investments, and that would include private markets assets. So now, large institutions, by which I mean big pension funds, big insurance funds, endowment funds, for example, university endowment funds, family offices and so on, have increased their allocation to about 20% into alternatives. A big part of that is private assets. Okay.
Jon Kirk:Okay, and how has the private markets industry managed to attract those funds, and so outgrow public markets or grow at a faster pace at least, And do we
James Tulloch:think that's sustainable, particularly in a world where we've seen interest rates normalize? Yes.
Jon Kirk:I mean, it comes down to, really, I mean, it's a number of things, including, for example, diversification. It does provide a way of diversifying your asset base as large investors. But really, the ultimate thing is that it's about investment performance. And so typically, we see, if you look over the last ten or fifteen years, private equity and private credit have outperformed their public listed counterparts by between 12% per annum, which obviously compounds up to quite a large number over that sort of period of time. Infrastructure as well, it's the same, not quite as stark a difference in performance, nonetheless, private infrastructure has outperformed.
Jon Kirk:Interestingly, real estate hasn't. So public real estate vehicles such as REITs Mhmm. Have actually outperformed their their private market competitors
James Tulloch:Okay.
Jon Kirk:Over the last ten or fifteen years. But nonetheless, that it basically comes down to investment performance. And and, you know, that's important because if you are investing in private assets, you're you're tending to commit your funds for long periods of time, perhaps up to ten years Mhmm. Where you can't access it at all. So so you you get paid for that in in higher investment performance.
Jon Kirk:So it's critical that continues. So so what do I think that will continue? I think it will, because the the main structural reasons why, I think, are still intact. So if you take private equity, for example, private equity is investing in private companies, which tend to be almost by definition less mature than listed companies, and that means that at the end of the day, they have higher growth prospects, longer term growth prospects than than their public listed counterparts. And therefore, all things being equal, you should be able to deliver a better investment return on them.
Jon Kirk:I think the second thing is that private equity can do things with companies that public equities, you can't do in public markets. So so you can take, for example, distressed companies or younger companies that require heavy investment or heavy restructuring, and you can undertake that over a period of time that that frankly public markets would not tolerate. And you can add a lot of value doing that, but it does require patience and it does require risk appetite. And I think to that point, you know, risk is an important consideration here, you are taking greater risk. Now the art of the of the manager who is who's managing investments in private markets is to is to choose the best investments they can, and I think one of the key points here is that there is a very large field from which they can still choose.
Jon Kirk:Mhmm. So if you look at companies earning more than a $100,000,000 in sales, in The US, that still constitutes more than 90% of all companies, and in Europe, it constitutes more than 95%, so there's a huge field out there for for the skilled investor to choose from, and I think that's a big part of their value proposition. And then I think the final point is a slightly softer point, which is about attracting management talent, so the private equity firm will invest in a firm and will typically either retain the existing management of that firm or bring in new management, but it's a very attractive place for senior management to be, because frankly, the rewards can be higher, you tend to be much more geared into the performance of your company, so if you're successful, you can you can make a lot more money. Yeah. But also, you do it privately, you know, unlike in a listed company where the board's pay is on full display, so that's also attractive, so it allows you to track the best management as well.
Jon Kirk:Yeah. Okay. Okay. And do you think
James Tulloch:the industry can continue to attract new funds in the in the longer term? I think you specifically have whether some of the potential barriers to wider retail, the retail wealth investor market can be overcome, such as transparency and liquidity, for example.
Jon Kirk:Yeah, I think that's a great point. So as I said up until now, it's been mostly institutional money, and I think that they will continue to allocate a higher proportion of their funds to private markets. But really, the next ten years is going be about attracting funds from predominantly wealthier individuals, so perhaps those with more than a million dollars or so of investable assets. Now, that is actually a very large market. In terms of scale, it's about $150,000,000,000,000 globally, so it's a huge market, and that's actually almost exactly the same as the institutional market I mentioned earlier.
Jon Kirk:So there's a lot to go for here, and and the industry is now building products that suit individual investors, so they typically mean by that, they typically mean enhanced liquidity, so you can actually access some of your funds. Typically, it's about 20% per year you can withdraw. So you're still very much less liquid than you would be in public markets, but at least you can get access to your money over the period of the investment. Also, the the big private equity firms are building distribution channels to access those kind of people, so they're forming partnerships with private banks, Morgan Stanley, Goldman Sachs, UBS, for example, as well as with big public markets, institutions such as BlackRock or Wellington. So those with a good brand, a good distribution, a good product mix, an asset mix, I think you're in very good shape to tap that market, and actually, the early signs are very encouraging.
Jon Kirk:In the last couple of years, there's been very substantial growth. Yeah. Okay. And then think about the market at the moment, John, you know, what are the current operating conditions like? Yeah.
Jon Kirk:Well, I mean, as as Giles said, it's been a very, very volatile year, and I think going back a couple of months, it was looking quite quite downbeat for the industry, but actually, have stabilized an awful lot. So, you know, the the these stocks just, you know, they they are they are volatile, they they typically move more than the market moves, so if the market moves by 1%, then these stocks will typically move by about one and a half percent, and the reason for that is that the public markets do have a bearing on the business models. So in the most obvious way, public markets provide valuation benchmarks for the assets held by the private markets companies. So as markets go up and down, that has an impact on on what the private markets assets are worth. But also, markets provide an exit route for, for example, private equity, most obviously through IPO, for example.
Jon Kirk:Mhmm. And so when public markets are are stable and healthy, it makes it much easier for the private equity firms to sell their assets, and they'll typically be selling them at higher valuations. So it's great to see that markets have stabilized a lot, the policies that Donald Trump is is following at the moment are likely to, as Giles said, likely to lead to a soft landing scenario, and that's a that's a much healthier environment in which private equity can operate. Yep. And to be fair, we are now seeing a pickup in IPO activity in The US, we're also seeing a pickup in M and A activity, which again reflects greater confidence in capital markets, so the backdrop is looking quite a lot healthier than it would have been if we'd
James Tulloch:been sat here two or three months ago. Okay, okay. And, Giles, just to bring you back in here, just thinking about how this is a theme can might might evolve or or or influence how investment strategies are are are structured and how you allocate in the future. It's an area that you've been building positions in in recent years, isn't it?
Giles Parkinson:It is, yes. And also in the last month or two, look, part of a portfolio manager's job is trying to judge how you shape the overall portfolio according to different market environments and market backdrops. Effectively, yes, this might be a great company, Yes, it might be an undervalued stock, but is it gonna be a good stock for want of a better term? And this soft landing backdrop that we've had now for the last few months, and actually investors have increasingly begun to appreciate, Yes. As John's mentioned, this is a good environment, it importantly versus sentiment, it's an improving environment, and and share prices often trade on expectations.
Giles Parkinson:And here, the outlook has brightened versus where it was a few months ago, so yes, the listed private equity asset managers are something that we've been building positions in in the last month or two. Okay, okay, fabulous. Giles, as ever, thank you very much indeed, thanks, great to get your thoughts,
James Tulloch:And John, thank you very much indeed for your input as well. Really great to get your insight. And thank you very much indeed for everyone for listening. I hope you found the podcast interesting and informative. We will of course reconvene to do it again next month, but for the time being thank you and goodbye.
James Tulloch:Thank you. Thanks James. Thanks John.