Insight Talks: June 2025

This month, James and Giles dive into market events we saw over May (1:22). In the US equity markets extended their recovery from April’s lows and we saw easing trade tensions post Donald Trump’s “Liberation Day”. They also discuss the positive market reaction we’ve seen post the US Court of International Trade striking down most of Donald Trump’s sweeping trade tariffs (1:54). 

 

James and Giles turn their attention to in the UK and explore the deals on trade and relations (12:35) which brokered with India, the US and the European Union – termed a “Brexit reset” – in May, and our experts explore last month’s much anticipated interest rate cut from the Bank of England (15:50).

 

Finally, our special guest Sam talks James through key market themes and developments we’ve seen within the UK and the UK Smaller Companies Alternative Investment Market (17:12).

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 Investment Director, Sam Barton.

    

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

Host

James Tulloch

James joined the company as an Investment Specialist in April 2019, providing regulated investment advice across our investment propositions.

Guest

Giles Parkinson

Head of Equities

Guest

Sam Barton

What is Insight Talks?

Our in-house experts share our views on the current market conditions facing investors. Brought to you by TrinityBridge.

Speaker 1: 00:04

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: 00:34

Hello, and a very warm welcome to the June edition of the Insight Talks podcast with me, James Tulloch, joined as usual by our head of equities, Giles Parkinson. Hello, Giles. Hey, James. And this month, it's a real pleasure to also be joined by Sam Barton, manager of the our inheritance tax managed service here at Trinity Bridge. Welcome, Sam.

Sam Barton: 00:54

Thanks, James.

James Tulloch: 00:55

Great to see you both. Thanks very much indeed, as ever, for your time. Okay. So as ever is the case, lots and lots to cover in the next twenty, twenty five minutes or so. Sam will explore some of the key themes and interesting developments within your area of expertise, UK, UK smaller companies in particular, shortly as there's lots of interesting and very, very timely stuff to to cover there.

James Tulloch: 01:18

But we'll dive right into events over May, Giles, where equity markets extended their recovery from from April's lows as trade tensions post Donald Trump's Liberation Day continued to ease. Indeed, the S and P five hundred recorded its best month in eighteen months in sterling terms. And just last week, we had the very noteworthy development of U. S. Court of International Trade striking down most of Trump's sweeping trade tariffs.

James Tulloch: 01:46

The initial market reaction was was positive, if a little muted. But but just how significant do we think this could be?

Giles Parkinson: 01:53

So the federal court found that the president, he's overstepped his authority. That's that's a quote. And they halted both his blanket Liberation Day tariffs and the separate set of tariffs imposed on China, Mexico, and Canada. Mhmm. The reasoning here, James, was that tariffs typically need to be approved by Congress, but the court found that Trump's avoided this requirement by invoking emergency economic legislation under the International Emergency Powers Act in a fashion that wasn't appropriate.

Giles Parkinson: 02:20

Now, following day, a US Federal Appeals Court said that Trump's tariffs could actually remain in place while it considers the White House's appeal. Right. Trump himself, he took to social media to label the US Court of International Trade as wrong and political, stating that the Supreme Court must put an end to this. Now, ultimately, depending on how things proceed, the case could eventually progress to there. So there's no quick fix.

Giles Parkinson: 02:41

But it I think, James, an important pathway to taking the tariff stick away from the president has actually been opened up here.

James Tulloch: 02:48

Okay. Okay. So a story perhaps set to roll on and on. The major news earlier in the month on the tariff front, of course, was the announcement of a total reset in trade terms between The U. S.

James Tulloch: 02:59

And China. And tit for tat, retaliatory tariffs had gradually ratcheted up since the start of the year. So so this sudden de escalation of the trade war was was perhaps more significant than many had anticipated, wasn't it?

Giles Parkinson: 03:12

Yes. Definitely. I mean, what it was tantamount to was a complete capitulation by Trump. So what actually happened? Let's recap that.

Giles Parkinson: 03:19

So The US agreed to lower tariffs on Chinese imports from a 145%, effectively a trade embargo Mhmm. To 30, a more manageable level depending on the on the nature of the good. Mhmm. While on the Chinese side, tariffs on US goods were to be lowered from a 125 to 10. So it's fair to say that this was framed as a suspension rather than permanent cancellation with Trump intimating that indeed that these lower levels, 13 to 10%, might indeed rise again in three months' time if further progress on negotiations wasn't made.

James Tulloch: 03:52

Right.

Giles Parkinson: 03:53

But I think it's just this scale of the rollback that really caused investors and businesses to hope that this lifting of the trade policy cloud will prove more permanent. So as you say, this is a story that's just gonna roll on and on for the time being. Look, we get almost daily developments with Trump's comments and social media musings. Mhmm. Just the other week, he signed

Sam Barton: 04:11

a directive formally raising steel tariffs to 50% from '25, which raises trade tensions again with various partners. And The US is still locked into these dozens of bilateral negotiations with numerous trading partners over the so called reciprocal duties before their self imposed July 9 deadline, which of course came from the ninety day pause announced last month. So maybe as

Giles Parkinson: 04:34

listeners have gathered, there's a lot of different routes that the Trump administration is pursuing Yep. In terms of tariffs, lots of different countries involved, lots of different goods and commodities, lots of different percentage numbers being thrown out. But I think the main thing for us and for markets is that we are past peak tariff and also we've got this important court procedural aspect which is operating in the background. Okay, okay indeed.

James Tulloch: 05:00

And meanwhile, of course, further evidence perhaps emerging of the impact that this unpredictable approach to trade policy can have, isn't it, with The U. S. Economy reported to have contracted in the first quarter of the year, partly at least, as a result of a surge in imports ahead of the incoming tariffs.

Giles Parkinson: 05:19

Yes. We think that that's very much what happened. This contraction represented a notable slowdown following growth of 2.4% over the final quarter of last year. Now, of course, Trump was quick to lay the blame at the door of the previous administration, but I think it is undeniable in terms of the data that really what caused that negative GDP print annualized for q one twenty five was imports as businesses braced the introduction of Trump's own tariffs.

James Tulloch: 05:46

Yeah.

Giles Parkinson: 05:46

Now, let's look ahead to the future. Well, higher tariffs, they could well lead to high inflationary pressures and supply issues. It is gonna take time to really fully understand the impact on growth. And actually, it's one thing for a certain level of tariffs to be imposed, and then consumers and businesses adapt to that, but it's actually the policy uncertainty as well, James Mhmm. Which over recent months have been unlikely to have aided, at a minimum, unlikely to have aided optimism regarding the economic outlook.

Giles Parkinson: 06:13

But yes, I return to this point of, in terms of that policy uncertainty, we seem to be past the worst. And so for a moment, markets are responding well to that. Sure. A couple of other data points recently. What else is going on going on in The US economy?

Giles Parkinson: 06:28

So good news there. Broadly, jobless claims for unemployment insurance remain pretty well controlled. This is gonna be a key part of the Fed's I'm sure we'll ask about interest rates soon. This is a key part, not just inflation for the Fed's mandate, it's also employment. At the moment, unemployment seems to be controlled in America.

Giles Parkinson: 06:45

The economy is not in recession. Yeah. And again, US retail sales. So if you had those businesses adapting or front running the tariffs in in the first quarter, consumers themselves were also stocking up in preparation. That said, US retail sales did actually grow in April surging in March.

Giles Parkinson: 07:03

So look, overall data releases still suggest that The US economy is fundamentally strong. Mhmm. And then as a result, yeah, the Federal Reserve is unlikely to be in a rush to cut interest rates to support growth. We do expect the next move out of the Fed is definitely going to be a cut rather than a hike, even if they remain on hold for now.

James Tulloch: 07:19

Yeah. Yeah. And on the subject of the the Fed in a widely anticipated move, they kept US interest rates steady for the meeting in in a row in in May. How do you assess exactly where the Fed is with it with its its thinking at the moment? So

Giles Parkinson: 07:34

I think the Fed's very much on hold for the time being. Yeah. Look. They're just waiting to get a handle on the pass through of tariff inflation, while The US economy, as we just mentioned, you know, it does remain in decent shape and out of recession despite that optical q one contraction. And in terms of latest communication we've had from the Fed, they've stated that the uncertainty about the economic outlook has increased.

Sam Barton: 07:53

Mhmm.

Giles Parkinson: 07:54

No real surprise there. Mhmm. Whilst the risks of higher unemployment and higher inflation have also risen. Again, not a big surprise. So they they suggested that they're gonna remain in this wait and see mode until they have a fuller understanding of the effects of the Trump administration's trade tariffs are gonna have on The US economy.

Giles Parkinson: 08:10

It's almost like that they would prefer to be late and be certain to have been late rather than act in a more preemptive fashion. So that does create a little risk for markets potentially. And look, Jerome Powell, he went as far to say, quote, it's not at all clear what the appropriate response for monetary policy is at this time. Yeah. That said, we come back to, for now, The US economy seems to have got past that initial period of policy uncertainty intact.

Giles Parkinson: 08:36

And although there is pressures on growth from higher interest rates, for now, the job market, the rate of unemployment remains contained.

James Tulloch: 08:45

Okay. Okay. Quite. And then and then of course, like later in month, we did of course indeed have the latest US CPI inflation print, potentially might help Powell and the Fed grasp a slightly better indication as to what the appropriate monetary policy response should be perhaps. What what do we learn there?

Giles Parkinson: 09:02

Yes. So the annual rate of US inflation in the last sprint for April, again, 20 before the tariff impact, dropped to 2.3%. That was down from 2.4 in March compared to the same period last year, and that was below market expectations.

James Tulloch: 09:15

Mhmm.

Giles Parkinson: 09:16

Effectively, it really was an ice cold inflation print. But because tariffs are now in the front view mirror, that CPI print should really be seen as rear view mirror stuff.

James Tulloch: 09:25

Yep. Okay. Okay. And finally, as far as The US is concerned, Giles, on fiscal front, Donald Trump unveiled his signature tax and spending bill, which he dubbed the big beautiful bill. Now beauty may well be in the eye of the beholder, but size was was was not in question, was it?

Giles Parkinson: 09:42

Definitely not. No doubting the size. Various estimates, ways of cutting the numbers, but the bill's probably gonna increase the budget deficit by some 4,000,000,000,000 US dollars over the next decade. What's inside it, effectively, this bill extends many of the otherwise expiring tax cuts that were implemented during Trump's term. Yep.

Giles Parkinson: 10:02

There's also been boosts, again, no surprise to defense and border security. On the flip side, the bill does contain some some spending cuts, particularly with those aspects of US government, has seen them more aligned with the Democrats, such as Medicaid health program and some support for lower income families. Look, the bill is still very much contentious. It only passed through the House of Representatives, that's one of the two chambers by the narrowest of margins of vote two fifteen to two fourteen. Yeah.

Giles Parkinson: 10:30

And it's now being scrutinised by the Senate. So further alterations to some provisions in the bill are probably likely, and it's not guaranteed that the fiscal hawks are going to remain quiet in all of this.

James Tulloch: 10:43

Yes. Yeah, absolutely. And on the subject of worsening US public finances, It was not only Elon Musk who was seemingly upset as credit rating agency Moody's downgraded The US sovereign rating from the top notch AAA in the same week that the tax cut and spending bill was announced, didn't they? What what do we make of this?

Giles Parkinson: 11:06

Yeah. So The US has got the bond market breathing down its neck. It was the downgrade of US sovereign debt by Moody's since 1917. It's fair to flag though that actually Moody's out of the three major rating agencies was the last Yes. To move.

Giles Parkinson: 11:21

But it's just a reminder really of the numbers that we're seeing over the next decade. So Moody's anticipate the federal deficit winding to almost 9% of GDP, this is in peace time, by 2035, up from 6.4% in 2024. There was some volatility in The US bond market, so The US treasury yield did touch four and a half percent on the back of the announcement. That's the highest level since February, And whilst at the longer end, so sort of further out, where arguably investors are being asked to take more risk for lending to US government, those thirty year treasury yields rose about 5%. Now, that that hasn't been seen since November of twenty three.

James Tulloch: 11:55

Yeah.

Giles Parkinson: 11:56

So it is fair to say that although Moody's didn't provide new news to investors, there is in the background some growing investor concern and uncertainty regarding fiscal policy direction under president Trump. And if potentially we are to think about a risk to markets from here, it would potentially actually emanate to the equity market from the treasury market in terms of effectively a bond buyer strike as the market seeks to impose discipline upon the government. But all this is in the potentials. This spending bill is still very much up for negotiations still.

James Tulloch: 12:28

Yeah. Okay. Okay. And then back here in The UK, Giles, it was a busy month for the Prime Minister and the government with deals on trade and relations brokered with India, The U. S.

James Tulloch: 12:38

And the European Union. The trade deal with India brought three years of negotiations to a close, but it was perhaps a deal with The U. S. Which made greater headlines. Now this was put together somewhat quicker, although it's relatively narrow in scope for for now, isn't it?

Giles Parkinson: 12:53

So, yes. There was an agreement reached between The UK and The US to reduce or remove tariffs on certain goods. That base level 10% tariff previously announced by Trump does still apply to most goods entering The US. But the key elements was deal to reach to reduce or remove tariffs on things like UK autos, as well as aerospace goods and some metals from The UK. And in return, The UK has to remove tariffs on US beef imports, although the government insisted that there'd be no weakening of UK food standards.

Giles Parkinson: 13:22

Okay. Look, this deal is a long way short of a free trade agreement. It's relatively narrow in scope. The US and UK are not major trading partners in the grand scheme of things. However, may at least demonstrate a willingness and resolve to address some of the prevailing global trade challenges.

Giles Parkinson: 13:37

And importantly for the US administration, it was one of their early wins that they were touting in terms of an ability to strike one of these bilateral trade deals in response to the tariff uncertainty.

Sam Barton: 13:48

Mhmm.

James Tulloch: 13:48

Okay. So potentially a slight period of limbo might continue there. But on the other side of the Atlantic gels, a deal was struck with the European Union termed a Brexit reset. What can you tell us there?

Giles Parkinson: 14:03

Yeah. Definitely seems a bit of reset with The UK is underway. So what do we get? We've got some packs on security and defense, diluted rules on food imports. Now all of these might, at the margin, help economic growth.

Giles Parkinson: 14:14

So that's got to be good news for for Labour. In return, UK's extending fishing rights and territorial waters by twelve years and agreeing to some aspects of the European Court of Justice's oversight. So but the overall outcome still constitutes a relatively hard Brexit. Yep. Again, it's it's taken almost ten years to get to this point.

Giles Parkinson: 14:36

Mhmm. But no major red lines such as customs union were crossed. But there is now perhaps a slightly softened stance and a pathway to increased cooperation with the with the EU. And as I just mentioned, at the margin, this agreement probably does help growth within The UK.

James Tulloch: 14:50

Okay. And on the subject of of growth elsewhere, there was some further welcome news as far as economic growth was concerned, isn't there?

Giles Parkinson: 14:56

Yeah. So just recently, The UK's economy was announced to have grown fast anticipated in the first quarter twenty five. Welcome boost for the government, all else equal, bigger economy, more tax revenues. Figures released by the ONS show that The UK GDP rose by plus 0.7 from January to March, up from plus 0.1 in the previous quarter. So an an an acceleration there might have been a bit of a weather boost if people think how how how they might have been spending.

Giles Parkinson: 15:22

That's past the year. Actually, James, that puts The UK currently fastest growing g seven economy in 2025. However, the outlook for remainder of 2025 is, of course, a bit more cautious. We've got rising household bills, many of which took effect from April, as well as increased employer costs. Remember the statement that we had in the springtime, and this is expected to weigh down growth in the near term.

James Tulloch: 15:47

Okay. Okay. And obviously, in a much anticipated move, Bank of England did indeed cut interest rates by 25 basis points to 4.25% in May, although market participants were perhaps a little bit surprised to see that the minutes of the bank's meeting showed that the MPC, the Monetary Policy Committee, was more divided on the the the future path for for policy than than perhaps expected. And the inflation figures released slightly later in the month, perhaps highlight one reason why, Giles.

Giles Parkinson: 16:14

So those inflation figures showed a jump to 3.5% in the twelve months to April. That was up from 2.6 in March. And that jump in the print was not unexpected, given that various household bill increases kicked in from April. But it was the scale of the increase, James, which really did surprise forecasters. And I think it has served as a shot across the bows for the Bank of England.

Giles Parkinson: 16:36

And indeed, Bank of England chief economist commented ahead of that inflation release last week, suggested that the pace of interest cuts have been too rapid, and there's greater caution on the part of of MPC colleagues before voting in favor of further rate cuts. So look, the Bank of England does want to cut rates, but the timing and pace remains uncertain from here. Financial markets are still anticipating two more cuts to 3.75% by year end.

James Tulloch: 17:02

Sure. Okay. Alright. Giles, for the time being, thank you very much indeed. But on the subject of The UK, UK economy and in particular, UK smaller companies, we'll bring in Sam here because, Sam, obviously, that's your area of of expertise.

James Tulloch: 17:17

Now your role in managing the inheritance tax managed service here at Trinity Bridge is is to run an AIM business relief offering, then, obviously, that involves managing discretionary portfolios of between twenty five and thirty five AIM or alternative investment market listed companies for clients, with the primary objective of allowing them to reach a beneficial tax position with regards to inheritance tax by capitalizing on business relief, which many, but not all, aimlessly businesses qualify for. But as far as UK smaller companies are are concerned, Sam, perhaps you could just sort of set the scene a little bit here because sentiment towards The UK market in general has been fairly poor for for a number of years. Both domestic and international asset allocators have increasingly skewed The UK. Another developed markets, in particular The US, have notably outperformed over the medium to longer term if we sort of think the three to five year plus period. So just remind us of what's been going on here.

Sam Barton: 18:12

Yeah. I mean, obviously, there's been a period of geopolitical uncertainty. UK has not been the cleanest place, I suppose, to operate. Going as far back as Brexit, we mentioned the EU and that whole relationship earlier on. Yeah.

Sam Barton: 18:28

So fears over UK competitiveness, growth, etcetera, have weighed on investor sentiment in The UK. You've then had, you know, the omni shambles budget of Liz Truss, Quasi Quartain, etcetera. And, you know, just topping off the fact that we've had, you know, six chancellor we had six chancellors in a three and a half year period, four prime ministers during that period, huge political instability, really unhelpful for sentiment towards The UK. The kind of point has just been around inflation and how that's impacted The UK. So UK is very much an import driven market, services driven economy.

Sam Barton: 19:04

That meant The UK was more exposed to price shocks post COVID, so as you saw supply chains reopen and goods become, you know, a shortage of goods, then that obviously caused some inflationary pressure. It was much worse in The UK than it was elsewhere. That inflation was also more persistent. So what we've seen is rates getting higher in The going higher in The UK and lasting for longer. And then finally, we've had the issue around government finances.

Sam Barton: 19:29

So post COVID, we didn't quite have time to repair the account, you know, the the the government finance government finances, which left limited scope to stimulate the economy. And you know, going back to The US again, looking at the size of those deficits that The US is expected to run over the next few years, you know, makes The UK deficits that we're gonna run here pale into insignificance. And that obviously will have a huge impact on growth on a relative basis.

James Tulloch: 19:53

Yes, sure, sure. And I guess as we've alluded to perhaps sort of exacerbating the issue in the eyes of investors over recent years has been the fact U. Markets over that period, over recent years, have gone from strength to strength.

Sam Barton: 20:06

Yes. I mean, obviously, with The U. K. Being slightly out of favor, there's also the push factor away from The U. K.

Sam Barton: 20:12

And also the pull factor towards The US and those large cap stocks, the Mag seven, etcetera, attracting so much investor interest. So what we've seen is basically month on month outflows from UK open ended funds the last three years. So really difficult backdrop to actually get some real traction in terms of getting good returns from UK equities. Sure. On top of the open ended funds, we've also seen pension fund assets hitting their all time lows in terms of UK equity exposure, so down to 4% in some estimates, wherein if you look abroad, if you look into Australia, you're looking at 40% domestic assets and pension funds.

Sam Barton: 20:49

That's a massive difference, and obviously as capital gets sucked out, that puts pressure on share prices, that's why we've seen some more abundant performance from The UK market.

James Tulloch: 20:59

Okay. Okay. And then, of course, in The UK following the election in the middle of last year, one would perhaps have hoped that that would have ushered in a period of relative stability. Is that what we've seen thus far?

Sam Barton: 21:11

Okay. So what I mean, what we saw were the early policy choices from the government were poorly received. I mean, you look at how, you know, how inexperienced the government is in terms of, you know, the Labour Party's been out of power for a long time period of time. A lot of young MPs coming in with limited experience.

James Tulloch: 21:28

Mhmm.

Sam Barton: 21:28

So obviously, there were gonna be some missteps here and there. But those early policy choices, including, you know, big public sector wage settlements Yeah. You saw national not national living wage, sorry, apologies. The winter fuel allowance Yeah. You know, were were not really well received either by the electorate and and also by by businesses.

Sam Barton: 21:50

So that, you know, that was not a great start. That was exacerbated by a lot of really downbeat rhetoric about, you know, state of the economy and the state public finances. Mhmm. When it wasn't quite back to the days of there's no money left left left on the chancellor's desk, but but it it it, you know, that messaging is was deeply unhelpful for both business and and consumer confidence. You know, surveys looking at, you know, consumer confidence numbers really down in the dumps, know, near near historic lows.

James Tulloch: 22:17

Right.

Sam Barton: 22:18

Business confidence, you know, equally struck. So that's not a great place for markets, not a great thing for economic growth. Mhmm. So, you know, in that context actually the, you know, recent GDP numbers have been explainable, but also surprisingly robust.

James Tulloch: 22:33

Yeah. Yeah.

Sam Barton: 22:36

And then obviously, you've got the state of public finances. I mean, is obviously a worry. The chancellor's got her new fiscal rules that hopefully she'll be able to adhere to, but the higher public sector wages and higher infrastructure spend will leave, you know, limited wiggle room there. And, you know, bond markets have read that. And so that's, you know, it it leaves her in not a great position.

Sam Barton: 22:58

So, you know, one of the other reasons that people have probably just stayed away from The UK.

James Tulloch: 23:03

Yeah. Sure. And this this sort of uncertainty or difficult backdrop was perhaps particularly particularly true for for AIM.

Sam Barton: 23:11

Yeah. I mean, after following the election, you know, there was a lot of rumor, a lot of kind of ink spilled about what the tax status of AIM was going to be. Obviously, the business property relief, that inheritance tax break for AIM has been well debated and certainly was in the run up to the budget. So there were lot of fears amongst investors about whether that would be fully removed. Yeah.

Sam Barton: 23:36

So that's the way AIM underperformed in the run up to the budget, so from June to October. And then obviously, budget came along, that relief was halved. Mhmm. So while AIM experienced a very brief bounce, it was about 4.5% on the day of the announcement, it's continued to drift afterwards as investors have gone, okay, the gold price have moved slightly here.

James Tulloch: 23:59

Yeah, sure.

Sam Barton: 23:59

But we're going to touch on that a bit more later on.

James Tulloch: 24:01

Yeah, absolutely. So I guess these factors have been at the heart of AIM's underperformance in the difficult environment for UK smaller companies in general in the last few years. So where does it leave investors now?

Sam Barton: 24:12

Yeah. I mean, so what you've got is UK valuations, UK equity valuations remain pretty depressed and therefore very reasonable, which is, you know, difficult on one side, but actually encouraging on the other in terms of when you're looking forward. So if, you know, taking some statistics, UK trades about 25, 26% discount to The US market.

James Tulloch: 24:32

Mhmm.

Sam Barton: 24:32

A small discount to to European markets.

James Tulloch: 24:35

And Right.

Sam Barton: 24:36

Smaller companies we've seen, you know, similar thing, but exacerbated. Smaller companies because of the lack of liquidity in the shares or, you know, less liquidity in the shares, they are more volatile. Yeah. Therefore, they're seen as higher risk. And when you get the turmoil we've had in The UK followed by the Trump election, tariffs, etcetera, all those risk assets or the higher risk assets have struggled to to make headway.

Sam Barton: 25:00

You see it with the Russell in The US, you see it with small cap indices in Europe. Mhmm. So those volatile assets have been under pressure as well. Mhmm. So you see a bit more selling, bit of a flight to safety away from those volatile small caps.

Sam Barton: 25:11

So you've got UK generally small caps and then obviously the budget changes on AIM have been unhelpful as well.

James Tulloch: 25:18

Yeah, absolutely. So I guess to paraphrase you sort of almost triple discounts.

Sam Barton: 25:21

Yeah, absolutely. Yeah, I mean, top of being the relative valuation of The UK compared to other markets, we've also got the historic valuations. You know, you've got the FTSE small cap trading as sub 10 times multiple, haven't seen that very often. Chance of returns from this point are actually really encouraging. And, you know, I've only seen valuations down at these levels a couple of times in my career.

James Tulloch: 25:44

Right.

Sam Barton: 25:44

So 02/2003, the aftermath of the .com boom. Yeah. 02/2009, financial crisis, really briefly during the pandemic and that was really briefly. But you really what we see is really, really attractive valuations. And you have to question whether those are sustainable.

James Tulloch: 26:04

Yeah, yeah, sure. And so it seems there's a bit of a dislocation here. Are there any other reasons for that? I mean, we touched on The UK economy already, but is Yeah.

Sam Barton: 26:12

I mean, actually, you know, as Joel said, you know, The UK economy has been amongst the best performing Yeah. You know, economies year to date, very short period of time. But, you know, if you go back before the election, UK GDP was up there, you know, it was the fastest GDP growth in the G 7. So it's been good. The GDP numbers have been very volatile as have, you know, as have a lot of economic data.

Sam Barton: 26:34

So yeah, it's difficult to get a read on that at the moment. I suppose broader positivity around inflation is coming down slowly or has been coming down slowly. Obviously, the last spike very much expected by markets. And hopefully, we'll see that drift off over time. It's interesting to see some of those inputs coming down already in terms of energy prices.

Sam Barton: 26:54

So the price cap will come down in the next quarter. That leaves us hope that there are going to be more rate cuts to follow, as Giles alluded to, a couple expected this year. That generally leaves us with a more constructive environment for shares. The government spending announced the budget, now while it gave the market a bit of the heebie jeebies, should be a positive for growth. What we've seen is spending reviews ongoing.

Sam Barton: 27:21

Obviously, you had the defense spending review out earlier this week, and then you've got broader spending reviews coming up later this month. Yeah. That will actually mean that that cash starts to get spent. So you haven't seen the benefit of any of it. You've had the downside, but none of the upside.

Sam Barton: 27:36

Yeah. So when the cash actually does start flowing to the economy, you should see a GDP growth from And then finally, just UK consumer. So I mentioned the confidence was really, really low, but actually the position of The UK consumer is actually in a pretty good place. You know, just looking back on UK consumer debt or household debt to GDP is at the lowest level for twenty two years. Yeah.

Sam Barton: 27:59

So there's a lot of gas in the tank. You've had those national living wage increases have been positive to The UK consumer. Yeah. Real earnings have gone up if you take the ASDA income tracker for the last, whatever it is, twenty six months or

James Tulloch: 28:13

so. Okay.

Sam Barton: 28:14

So people are gradually building up savings again, and you're just beginning to see the signs of consumer spending again, which is which is really helpful. Mhmm. And, you know, a massive part of The UK economy. We're very good at spending money. And then just onto the political side, rough start to life for this new government.

Sam Barton: 28:36

They seem to be finding their feet slightly. That focus on growth should be really helpful. If you look at relative stability of The UK, obviously, we were bottom of the pile for quite a while Mhmm. You know, during the during the nineteen to twenty two period. But now I think we're in a much better place.

Sam Barton: 28:53

I mean, you've seen elections in Germany, rise of AFD Yeah. Macron looking a bit like a lame duck. Yeah. We won't mention what happened on the airplane. And then obviously, you've got Trump.

Sam Barton: 29:04

I mean, you know, that's the not exactly the byword for political stability.

James Tulloch: 29:08

Yeah.

Sam Barton: 29:09

You've got tariffs, UK actually in a good preferential position. If only we could go back to liberation day when we were down at 10% and the rest of the world was up at 25 plus, we'd have been in great shape. But actually, not a bad outcome in the grand scheme of things, particularly given that U. S. Trade isn't a massive part of The UK economy.

Sam Barton: 29:29

Obviously, much bigger trading partner on the continent and that hopefully the reset is going to help improve trade between The UK and the and the EU. What we're seeing, I think, a bit is markets cottoning onto this to some I mean, you've seen sterling much stronger against US dollar year to date, broadly flat against the euro. And UK equities following the whole GDP thing are actually amongst the best performing asset classes year to date, in spite of the heavy exposure in the oil share to the oil price and also US Dollar owners. So, you know, it's pretty encouraging to see that.

James Tulloch: 30:10

Yeah, sure. Okay. So plenty of reasons for optimism, it sounds like. Now a service that you manage, you and the team manage, Sam, is a specialist service which requires detailed professional financial advice before investing. So we can't really explore it in detail on a relatively short podcast.

James Tulloch: 30:27

But I did want to just touch on the background and importance to to the AI market itself, because I think that's really key to understand. And in the coming weeks, it'll celebrate its thirtieth birthday, and it's been quite on quite the journey since its inception all the way back in 1995, hasn't it?

Sam Barton: 30:42

It has indeed. I mean, you know, it started off with 10 companies. Was a tiny tiny little thing when it got going. And, you know, grew to up to, well, I think 1,750, give or

James Tulloch: 30:52

take Mhmm.

Sam Barton: 30:53

Companies, you know, making it, you know, you say arguably, but definitely the world's most successful growth market.

James Tulloch: 30:59

Right.

Sam Barton: 31:00

And actually, you look across Europe, there is nothing similar to it. You know, that combination of businesses that are willing to list, willing to raise capital, a good ecosystem for doing that has been one of the great success stories. And, you know, people have tried to replicate it and failed elsewhere.

James Tulloch: 31:19

Mhmm.

Sam Barton: 31:21

The the original purpose of AIM, I'm going back to the start, was just provide a home for growing businesses, helping them to raise capital and deliver kind of good long term returns. Now, obviously, that's been a bit difficult. Perhaps too easy to raise capital on AIM in the early days.

James Tulloch: 31:36

Right.

Sam Barton: 31:36

So, you know, going back to .com, you know, AIM was six years old when the .com crash happened, but prior to that you saw a lot of funny listings of anything with .com at the end of it. Yeah. It built itself kind of a little bit of a tarnished reputation. And I just don't think that's really a fair reflection of the quality of the companies that are available on AIM now. And obviously AIM's been a great growth engine for the economy.

Sam Barton: 32:01

Know, you're looking back, you know, LSE had a report commissioned last year saying that, you know, 4,000 businesses have raised capital on AIM, raising 135 odd billion pounds.

James Tulloch: 32:14

Right.

Sam Barton: 32:14

So huge amount of capital raised for the market. Those companies have grown, created jobs Yeah. Paid taxes Yeah. You know, helped to boost the economy. Yeah.

Sam Barton: 32:26

Huge amount of economic value has been created from AIM. So, you know, it was very disappointing from our perspective to see the changes to the the BPR regimes and why AIM was singled out.

James Tulloch: 32:37

So,

Sam Barton: 32:39

you know, very much supporting the smaller companies' engine room of The UK economy, and we're very happy to be part of that.

James Tulloch: 32:47

Okay. And what does the sort of lay of land look like today? What AIM look like at the moment?

Sam Barton: 32:52

So so I mentioned there are about 1,750 companies at peak. There are fewer than 700 at the moment. Okay. So a few things going on there. Let let let start by saying there are loads of opportunities out there, you know, these 650 odd companies that are left left standing on AIM gives us a pretty broad waterfront anyway.

Sam Barton: 33:11

You know? If you think that people invest in kind of mid cap, large cap funds, that's large cap at a 100 and mid cap and large cap ones at 350. Yeah. You know? We're we're almost double the size of that.

Sam Barton: 33:20

So Yeah. There's lots to go for, lots of interesting investment opportunities. And the companies are all in pretty good shape actually. Okay. So balance sheets are in a strong place.

Sam Barton: 33:30

They've weathered the storm really, really well. You know, obviously, you're gonna see a few dropouts such as life, such as markets. AIM is very much a dynamic market.

James Tulloch: 33:38

Mhmm. Mhmm.

Sam Barton: 33:40

So we've seen, you know, much of the pool has shrunk. There's still lots to be going after. But the reason there are a couple of reasons that the number of companies has shrunk. So one is companies leaving AIM. Two directions generally.

Sam Barton: 33:55

One is they're too small, they haven't succeeded, business case hasn't planned out

James Tulloch: 33:59

Yeah.

Sam Barton: 33:59

And basically becomes uneconomic. And the other one we're seeing of late is is more and more companies moving to the main list, which is frustrating from our perspective because it's like it being taken over. We can no longer invest in it, but we're not getting a premium when they go. Yeah. But what we are observing is you had one of larger ones, Gamma Communications, which is about 1 and a half billion market cap.

Sam Barton: 34:21

Quite a few IHT holders in there. And what we're seeing now is that capital being recycled back into other companies, which is gradually beginning to get some traction in terms of valuation share prices going up. And with others leaving for the main list of a similar scale, we would expect to see more of that happening. So it's almost like a closed loop where you're getting, you know, effectively the denominator is shrinking.

James Tulloch: 34:45

Mhmm.

Sam Barton: 34:45

But the numerate the numerator is shrinking at a less at a slower rate. And then the other reason that the number of companies has shrunk is M and A. That's reflective, we think, of the extreme valuations that you're seeing on AIM. You're seeing big premium now for takeovers, much as outside traditional equity investors have issued AIM, what we are seeing is private equity hasn't. And other companies where you've got that valuation differential are taking advantage of it.

James Tulloch: 35:19

Yes. Okay. And then just coming back to the issues of the budget, Sam. Again, all the sort of idiosyncrasies around business relief qualification are too much to discuss on a short podcast. But the upshot of the budget was that qualifying aimlessly companies, as you mentioned, saw their business relief benefit reduced from 100% to 50% effective from April of next year.

James Tulloch: 35:44

And as you mentioned, other non aim business relief qualifying assets were not singled out in quite the same way, which I think was perhaps a little bit difficult to to to reconcile, wasn't it?

Sam Barton: 35:53

Yeah. I mean, I I think it's very much law of unintended consequences. Look, I can see why the reliefs on AIM were were looked at. They're very generous. We're not uncomfortable at a, you know, at a 50% relief, which effectively gives a tax saving of 20% to our clients.

Sam Barton: 36:10

But the fact that you have these other services who invest generally in assets in the ground, shall we say? So solar wind farms

James Tulloch: 36:21

Yeah.

Sam Barton: 36:21

Broadband, etcetera, don't create the jobs that you see from AIM companies. Some of them haven't paid corporation tax, some of the larger ones haven't paid corporation tax for a number of years. So, you know, you're talking about relatively limited economic value. And what we would argue is kind of a slightly lower risk profile than you would see on AIM. Mhmm.

Sam Barton: 36:43

Yeah. You don't see the volatility in share prices trading daily, etcetera, etcetera, etcetera. So it is it was, you know, slightly confusing and gawling. They'd been left out of the loop. Now, you know, we've been doing quite a bit of work behind the scenes to try and flag that to to anyone who will listen to us effectively.

Sam Barton: 37:02

Yeah. Yeah. You know, about about that differential. But, yeah, I mean, it's it's it's been difficult to swallow. And obviously, given the treasury's extent requirement for cash, I would be surprised if there weren't further moves for for them to look at other other types of BPR assets.

Sam Barton: 37:23

That's not to say that I think you should see any change to private companies that are proper trading companies, family businesses, etcetera. I think, you know, they're they're already struggling with the the million pound limit. But

James Tulloch: 37:35

yeah. Sam, thanks very much indeed for a fascinating discussion. Great to be able to get your your your insight. Lots of great work going on there. Giles, thanks to you, as ever as well.

James Tulloch: 37:47

And thanks very much indeed for everyone for listening and joining us. We'll be back to do it all again next month. Between now and then, don't forget you can catch up on any insights from us on all the usual channels. Trinitybridge.com on the website has has everything there. But for the time being, thank you very much, and goodbye.

Sam Barton: 38:04

Thanks very much, James. Thanks, James.