Justin Urquhart Stewart, Money & Me, COVID-19 Special
In this episode, Graham Rowan talks to one of the UK's best known business commentators and stock market pundit, Justin Urquhart Stewart. Graham and Justin discuss the impact of COVID-19 in both the short and long term and discuss Justin's ideas of how innovation might be able to help us recover from the economic crisis.
The views expressed in this programme are not necessarily the views of the TV channel, it's officers or employees. The value of property and investments can go up as well as down. Always consult an independent financial professional.
- Hello and welcome to Money, Me, and COVID-19, where we talk to opinion leaders about the financial, business, and social impact of the coronavirus. My guest today really needs no introduction, he's managed to combine becoming the country's best known stock market pundit through his media appearances, but he's also been a founder and a key part of growing 7IM into the business it is today with a team of 300 people and 14 billion pounds under management. He's a winner of the Elite Investor Club's Lifetime Achievement Award, which you can see on the shelf behind him. And he's also in the middle of restoring the home of the former, former home of the famous artist Camille Pissarro which you can see in the painting over his left shoulder. He is, of course, Justin Urquhart Stewart. Justin, welcome to the show.
- Thank you very much, very flattered, thank you, pleasure to be here.
- So Justin, I'm rather hoping that with all your decades of experience, you could help us poor investors to achieve some clarity, but I suspect that even for you, this is a relatively unprecedented event. Now, you've had a month in lockdown to reflect on it. What's your take on the impact COVID-19's having on the global economy and on the financial markets?
- You're absolutely right, just fascinating, 'cause often people say, "You've seen this before." Well, we've seen crashes and things like that before this year, no, we have not seen this before. So, this is all completely new, completely different. and therefore we need to regard it in a rather different way because it will have very long-term impacts indeed. Now, you can, of course, follow some of the strange people who actually want to go around blowing up 5G masts and things like that and regard this as being close to the end of the world or you can regard it, actually, as being, yes, a financial and economic disaster, which is one which is quite capable of recovering from, which I believe it will do. But, it's going to take some nerve in doing so, some sensible decisions. But, when you look at our politicians, I'm not too sure you're necessarily gonna get those in any short order, but equally, some good economic decisions because, actually, the business of the economy is likely going to win out that, the logic of that. So long as we have the right decisions with regard to making sure that sufficient funds and capital and investments are made available at the right time to be able to make sure we can recover.
- Yeah, I mean, it's very strange. Some people, I think, are still talking about a short, sharp recession and a V-shaped recovery, but I just can't see that being the case. I mean, how do you see the rest of the year panning out?
- You'll get a full recovery and there'll be some excitement and the market will react, as we've already seen the market actually go through some quite exciting moments of recovery. But be wary, these are gonna be trap doors here because there are so many elements. Now, the good news about this is, interest rates are low and because of that, the cost of money is cheap. Also, we have the ability of the government to be able to actually to produce money magically, we know it can, it's called quantitative easing. Now, you got QE2, and I don't mean a dodgy boat, 'cause you don't wanna be on that, 'cause you'll probably get some terrible virus. But, actually, you will have the ability for governments, not just to actually produce more debt like that but to use some innovation here to actually allow us to be able to have more access to different types of capital. Now, let me give you some examples for this. I don't mean just countries producing more debt or even adding more infrastructure plans, 'cause those are all long-term things, that's a bit like the new deal. Doesn't really matter whether it happens or not, it's to highlight the good news that is given by government. What you need to be able to have though is access to capital locally. And in order to do that, actually, be able to encourage people to invest in local businesses and local infrastructure because governments won't be able to do it. Where does that money come from? The answer is, it'll actually be coming from the likes of us. And then to do that, you're gonna need some more innovation. And one of the areas I'm currently looking at the moment is actually helping to advise on regional investment hubs so that people can actually look at investing locally in local businesses, not investing in startups but existing businesses, not even ones that are necessarily floating at the moment, to be able to have simple mechanisms of participating in their businesses, they will need capital, they could be perfectly sensible businesses. You're not doing it out of charity, but you're doing it out of being able to be quite sensible, investing locally, cost-effectively. Why is this important and could be done now? Because, actually, if you're gonna go back through the original mechanisms, through London again and through the alternative investment market, knows that they are too expensive and too slow. We can establish this actually in quite short order and one of the areas I hope we're gonna be able to do it initially will actually be in the Midlands in Birmingham, where there's a demand for this, not only from people wanting to invest in local businesses, often quite significant investment clubs but also private offices as well and also private individuals, companies themselves that say, I'm not being able to get money out of the bank, except on some short-term at the moment, but actually, our investment money and we cannot go to, can't afford to go to AIM, the London stock market doesn't help me and the corporate finance houses in London are gonna be too expensive, so here is the opportunity for some innovation, so that's actually what I think is going to be quite exciting. So, what I've been writing about most recently is getting the government to come up with almost a form of financial pinata, you know, one of those paper donkeys you have to smack to get all the goodies out of. What I want the government to come out is a financial pinata when we're coming out of lockdown where you can come out with all these goodies, the corona bonds so that people could invest in actually helping to finance the government, probably be in, there'll probably be inflation bonds, index link bonds, with a loyalty bonus after five years and be able to make sure that you've actually got further support for EIS and SEIS, be able to have further support into ISAs as well, but also then, the ability to be able to reconnect the local financial plumbing for local investments, that put together would make a very exciting financial pinata, does not mean you get a V-shaped recovery, but it means you start getting confidence coming back in, that's the word you need to have, that has to come from government, that has to come from financial infrastructure, financial industry itself, to then be able to say to convince you and I and all our partners and investors, be able to say, I'll invest in this, I support it.
- That's a fascinating concept and in some ways, it's almost kind of back to the future because, of course, we used to have regional stock exchanges and also, I could see that actually playing well into Boris' plan for putting more infrastructure and investment into the region, so you might find you're pushing against an open door in government.
- I think so and certainly, and if he wants to replace the red wall with the blue wall and make sure it stays blue, you're quite right, he's gonna need that but what I don't want to see is the reinvention of silly gits in red braces again, so people like me, the old-fashioned stock brokers trying to do it because they were actually in business for themselves, what we actually want to have is the plumbing to create the mechanisms so the finance capital can be put into the regions cost-effectively, locally to start with but if it's successful, then it will attract from other regions, it'll attract from other areas, it may even attract internationally, so yes, it is almost like the local stock exchanges but without all the extra costs of market makers and all those elements and bits and pieces, you don't need that, keep it simple, actually try and reform what's going on but unfortunately, you know what our industry's like, we love looking back at sepia photographs of, weren't we very good in the old days, actually, we weren't, we were running a cartel and it was quite expensive but it sounds awfully polite. No, no, now is the time for some really cost-effective innovation to try and actually give some people the ability not just to invest, the companies to be invested in, and also provide something which is cost-effective, now you're doing something worthwhile.
- Yeah, absolutely, now and I think I can see why we need a different kind of organisation because if you look, for example, at the business interruption loans concept which is okay in and of itself, what the big banks who've been charged with implementing it have done has been to put so much slow bureaucracy in the way, demands for personal guarantees and so on that here we are a month plus into the scheme, I think there's only two or three thousand loans actually been approved so, we need to get the money out there faster.
- And that's the issue here, we haven't been brave enough. The concept of actually saying to people, well, banks will, they'll take on 20% of responsibility. Well, no, it's still 20%, that means they still have to go through due process, they have to do their checking, why? Well, because that's what they're supposed to do, they're banks. Whether you think they're any good at it or not, that's not the point. No, no, moments like this, this is where you actually need free money and lots of it. They may get worried about the fact that, actually, our level of debt's gonna get up to a high level. Remember, our debt to GDP ratio, debt to the value of the economy, was at about 88%, got down to 82% after the period of austerity, but now it's gonna go up to 150, maybe 200% and people say, this is appalling, we've never had, yes, we had, we have been there before. Now, you weren't there, no, and nor was I, thank heavens, quite close but actually, in 1815, we were at 200%, after the Napoleonic War. It took a long time to get through that but actually, with low-cost money, you grow the economy and the other thing to remember, actually it's by producing this debt, this money, you're using it for investment. Investment by its nature is money going into something which is actually going to provide a return, either an actual financial return or a productivity return, if it's a motorway or a train or something like that, and being able to provide that return to the economy in the longer-term. Don't get hung up on the fact that it's so much debt. Governments in the past have gone along, thinking about saying, you know, we want to have an investment. Now is actually the opportunity, not only to actually make sure you do high levels of investment but at an astonishingly low cost. In real terms, money is free, well, it's not free obviously but actually, in terms of real inflation, real returns against inflation, it's actually at zero at the moment. So, now is the time to be doing it. It's not a nice thing to do but thank heaven we've got at least that advantage.
- Okay, now if there has been one blessing to COVID-19, it's that it's taken Brexit off the national agenda for a while. But when I listen to you talking about regionalization and innovation, I can't help but think we need to bring Brexit into that discussion because we've got to look at what do we want Britain to be post-Brexit, it's only next year, we're only eight months away from it so could you see some combination of perhaps new corporation tax rules, as well as the regional corona bonds having a part to play in that?
- I think this actually could be a very exciting opportunity, leave aside all the issues we argued over Brexit in the past five years and actually sit there and say, all the countries in Europe have got a major problem to manage, the EU itself, or more Eurozone members have got a big problem because the less they do adopt their pan-European corona responsibility, that goes to the, fundamentally, it's the heart of having a single currency. Remember, we have a single currency in Britain and we have government gilts, we all take responsibility, whether we're a mad Scot or whatever we happen to be, we're all part of that. We may end up with regional debt but actually, it becomes centrally responsible. Unless you're gonna get the position whereby Germany can start taking some of that responsibility, sharing that responsibility, it will eventually fall apart. Now, leave aside the currency for one moment and now actually think about the reforms of what those countries need to do, they too need to be able to have new mechanisms of getting money in and be able to make sure they have new money into different countries, different areas, so that we want to be able to make sure that German companies can invest easily in Britain and be able to do, as they have done in the past. Our regional investment process may make that easier. Equally, the other way round as well. So, it would be a good opportunity actually to tie us in again with Europe, not in a political way, but in an economic way to be advantage of investors and also companies and also for the greater economy overall.
- Okay, now looking out across the rest of the 2020s, I think one of the things a lot of people aren't talking to at the moment, are struggling with is to try and see where we are sitting on this kind of deflation and inflation spectrum, 'cause you've got lots of deflationary things, like the fact they've switched off the world's economy for a few months, but you've also got inflationary things, like they're throwing trillions of new money at it, so how do you see, at the moment, yes, we've got record-low interest rates and relatively modest inflation. How do you see that deflation to inflation curve going over the rest of this decade?
- It's a lovely, perverse thing, isn't it? Inflation has always been evil, you and I are of an era where inflation eroded the value of people's capital but of course, there's a whole generation below us who, of course, never went through that at all, don't remember 20% inflation in the United Kingdom. Perversely, of course, actually in terms of having debt, you want some inflation, it erodes the debt away but I can't see too much inflation around at the moment. In fact, I see more deflation around for the time being. If we start getting a little bit more inflation coming into it, when you look at it, we're almost turning sort of really rather Japanese. You're seeing at the moment now, there's gonna be greater government involvement in terms of, not just government involvement in debt, remember, the government owns an awful lot of debt, of our own debt, who is the largest holder of government gilts, the answer is the government. No, they have at the moment, I think the last figure I saw was 16 billion a year of coupons, so spend thousands on government gilts, to the government, from the government, you can't make it up, could you? The Japanese government are the same, the Japanese government effectively almost controls the Japanese bond market and of course, the Japanese gone further and they also buy Japanese corporate shares, so again, it's to control the environment, that's not actually very good for the longer-term because if you're living in a controlled environment, how do investors make money when it's a controlled market, the answer is, be very careful indeed because that will come to an end at some stage. What we, I think, have to be looking at is therefore where are the growth areas coming from and if there's one underlying element you can see from what's happening now and you can see it in terms of how the share prices have been relatively protected by it, technology. It's the technology that has made such a huge difference this time and will continue to do so because it's so in the way that we're working and the way it's going to change in the future, so a combination of technology, also the other theme that's occurring, we're now becoming much more localised and there's gonna be a greater fear about saying, actually, do I want to be able to be dependent upon a huge, great production line stretching to Bangladesh and elsewhere or do I actually want to bring this in more locally to actually minimise the risk? So, I think there's some very interesting themes there, but to go back to the point of inflation and deflation, in theory, this should be inflationary but at the moment, until you start seeing constriction, I can't see the inflation coming through.
- Okay. So, just quickly talk us through, in terms of the main asset classes, you know, stocks, bonds, property, gold, where do you see those coming, going over the coming months and years and what should investors be thinking about in terms of asset allocation?
- Well, I'll start with, obviously, the largest asset class by far and away is obviously gonna be government debt over all bonds and what are the returns you're getting on there, the answer is, well, close to zero in reality. Of course, unless he wants something that's inflation-proofed and if I have my domestic corona bonds with a loyalty bonus to it as well, it's a little bit more attractive but you're not gonna get rich on that but it's gonna give you some security and if you believe the government's never gonna go bust, governments can go bust but actually, Britain's never actually defaulted, even America defaulted on its debt at some stage but Britain's actually had a very good reputation so we assume that's safe, so some safe money there. Equities, I'm still gonna be the firm enthusiast for equities and why? Well, obviously, the primary driver of equities is not the price going up, it's still the dividends and it's the compounding of those dividends. The bad news is, of course, as we've seen over the past few months, companies have been cutting their dividends, quite understandably, 'cause you can't be seeing, I'm gonna pay out billions of dividends, oh, by the way, can I have a handout? That's not gonna go down terribly well, as easyJet found out really quite quickly. So, actually, that's gonna be balanced quite carefully indeed. Having said that, the miners and the oil companies, also the energy companies are still gonna be in a position where they're gonna be doing that and they want to be able to have shareholders, loyal, longer-term shareholders, most institutions to whom they pay dividends and obviously then, as we are the investors behind that, hope you're benefiting from that, so still looking at those but be careful, it's changing. What's changing? Well, the mining companies are gonna be changing because in terms of how mining companies are behaving, we can see how that's already being impacted, 'cause green issues, which were nice to have five years ago, are now centre stage. Oil, well, the oil is fascinating as well. Saudi Arabia are desperate to sell Aramco because in 100 years time, it's going to be worth, what's the technical term, sod all. No one's gonna want oil. They'll want something else. And so, they're desperate to try and get the value out now if they possibly can but this value, it's going to be very small indeed. But the oil price will pick up to a certain extent but we're not gonna see the glory days of before, I think that's gonna be highly unlikely. The other area, therefore, is going to be in terms of, I think the one that's been so heavily hit is obviously gonna be consumer spending, 'cause consumers haven't been able to go out and spend and of course, they're frightened, they don't want to spend at the moment until they've got some confidence back. So, here's the measure. Give me some confidence, I'll start spending a bit more. This is the common theme you saw back after the banking crisis, the Americans fixed the banking system quickly, people started moving house again, the house prices started going up, they got confidence, they spent money and off they'll go. It's not that easy this time but if I had my financial pinata, then at least I hope we've got a government creating some confidence to create the private investor coming in behind that but we'll have to wait and see, it's not a big V-shape, it's a little V and then a long, slow, sagging recovery. So, that's gonna be an interesting issue. The other element, of course, is going to be in terms of housing market, something we're all attached to. And the good news is, we all still need housing but the betting on the old housing market before is not gonna be there for the time being, so I think we need to be really rather careful of that one indeed but there's still always gonna be demand but in terms of, what you saw in terms of property, in terms of the rent you saw and the yield you got from the high street and from those areas, those days are gone, you just have to see what's happening with Arcadia and Debenhams and the like, that's all changing shape. I come back to the issue of technology, technology, not just in terms of Amazon and having to deal with the FANG stocks, the fashionable ones, but on the other hand, they have done very well, and they're gonna probably continue to do well but the development of further on from that, in terms of actually further elements of entertainment, elements of being able to provide further drug support, elements of developments in new industries, it's going to be the technology that's going to be leading it and from that extent, that puts the UK in quite a good position, we're quite good at this sort of thing. We're good at innovating, we're just absolutely useless at being able to take it to the next stage, we innovate and probably sell it to the Americans. Now, if I've got my local funding operation, I can actually now develop it and then fund it to the next stage. Then it gets sold to the Americans, but I hope it doesn't, no, but hopefully there, we actually create more value here, that's what we need to be able to do and after all, look at what the universities have done over the past 15 years, they've gone from just being universities into actually now developing much more in terms of not just business schools but also making sure the ability to actually spin businesses out, not always very efficiently, but again, they haven't been able to get the funding structure so again, the element of localization, this provides for all of us, I think for investors, opportunities. Risky ones, but opportunities and at least with this one, they're gonna be local opportunities so you're gonna probably know more about them, which I find a little bit more encouraging.
- Excellent. So, coming back to the bigger picture from an investment perspective, has 7IM changed its strategy at all as a result of COVID-19?
- At the moment, it's interesting 'cause I have to actually declare an interest here. When we set the business up, I said, look, when Tom and I were doing this, he said, when we get to 65, we will step down because you've gotta let the kids take over, otherwise you just end up with a bunch of old farts sitting there for donkey's years. I forgot, I'm 65. So, I've found myself having to step down, so I've now left it to them is the answer so what are they doing about it? And the answer is, well, they're being suitability circumspect, they are being very conservative over it, 'cause that is the nature of the house, not taking big risks, rule one of investing is don't lose the sodding stuff, rule two, refer to rule one, grow it steadily over time and you know, now, some of their performance has not been brilliant over the past few years but 10 to 15 years, which is how I like to try and do it, it done exactly what we wanted to, an old phrase of what it was supposed to do on the side of the tin. I expect them to be continuing to try and do that but I expect, also, to be looking at the technology side to be able to see some of those more exciting areas of growth. One area that I've always liked in the past but I fear is going to be a lot more difficult is going to be that of emerging economies, that's going to be very difficult. I don't include China in that 'cause that's not an emerging economy but the older areas where people would say, this is the area where you're gonna see greater returns coming through, they're gonna have huge trouble with debt, debt forgiveness, getting in more capital, the medium-term, I think there's some great opportunities there but I think you're gonna have to separate those out. If we want to find some winners there, I'm still gonna be down in South East Asia, I suspect but I wouldn't be rushing to do that, we've got bigger issues to solve closer to home.
- Okay, now, most of those watching us will be people who've already chosen to sort of take control of their financial future. My fear is for the sort of 90 plus percent of the population who remain financially illiterate. What do you think the fallout from COVID-19 holds for many of those people?
- What it means is we have to actually make sure, as you and I have discussed before, the need for proper education on this and education does not mean this is part of the UK social cultural course or something like that, no, this is mathematics, so a core course to actually say, this is how you take this amount of money and you make it into that amount of money and also actually be able to buy your house, be able to look after your family, look after your pensions and all those sort of things. People have to learn the finance of finance earlier rather than later. Secondly, we have to teach them something which no one ever taught us either which is that planning across the generations as well. So, what responsibility do we have to our children, well, not necessarily give them loads of money 'cause as far as I'm concerned, I'll give them a good start but I expect them to earn themselves but what we can do there is actually make it as cost-efficient and effective as possible and teach them what to do. It's going to be a very difficult time for them. The returns they're gonna be expecting are gonna be thinner and so therefore, they're gonna have to find putting up with some pretty thin gruel over time, which means they have to start actually saving money now and for that longer-term and that's something that I think our generation probably should be doing, is pushing money for the next generation for their education or for their housing or such like, not making sure that they just by giving them a free ride, certainly not but I think, in many ways, we've had the best of it when it came to the property market, we've seen some fantastic returns in the stock market and of course, now we've had this really very significant change. It does improve but it doesn't go back to the way it was.
- Indeed. So, as we come to the end of our time together, Justin, obviously, we can't give investment advice but what would your advice be to the investors that are watching this programme at the moment, what steps should they be taking to survive and hopefully prosper coming out the other end of COVID-19?
- Well, in the position, if you're already and most of you have been invested, then actually, the damage is already being caused probably to your equity portfolios and so, to that extent, there's not a huge amount you can do. Having said that, there are gonna be areas which are gonna be more attractive than others and although people may be saying, well, cruise ships are being bombed out, it's probably the wrong phrase to use for a cruise ship but you know what I mean, it's not gonna be attracting a great deal of enthusiasm over the next few years, no, but the areas of leisure and hotels and those areas have been finding it very difficult. So, those are gonna be areas which will come back slowly but it's gonna take some confidence to do so. Make sure your portfolio's got those longer-term earners in the portfolio, which can benefit from it. There's some slightly dull ones, which I was talking about before, providing as dividends but also, there's ones which will, I think be throwing off the exciting businesses of technology. Now, there's gonna be another interesting element coming out of this, companies will restructure. As they restructure, that's a euphemism for actually getting rid of businesses. Some will go into administration for the right reasons, some for the wrong reasons, they'll come out of administration and they will divest other businesses. Doesn't mean they're necessarily bad businesses, but it will provide us with investment opportunities, so I would be looking now with some cash on the side, not to rush out and be buying the first thing that gets sold off by large corporations, but there'll be elements coming out of this which I think are gonna be very interesting opportunities where companies need the cash, these things are being sold off, quite often at a discount and that's an opportunity for us to be able to do. Put that in your high-risk basket, so make sure your portfolio is suitably defensively structured for the moment, make sure you're giving longer-term returns but then have your basket on one side here with two things, one, to take advantage of, once you've got through this stage, some of this further volatility and two, to actually use the advantage of some of these businesses being sold off which we can then say that's good value, they're selling it 'cause they need the cash and we can actually buy a decent asset with a long-term view to it and those may well be those smaller technology ones.
- Okay, and keep some cash aside for these regional corona bonds as well.
- Absolutely. I think that, in many ways, may well be our apology to say, look, I can't work in a hospital or do anything like that but at least I can do my bit to try and support it, it's almost like a war bond, I suppose, something like that. But I'd also be looking for my regional funds as well, if we can get the regional funding sorted out, I think there'll be some fascinating opportunities there but it needs some innovation and for that, I need some help from the government and the politicians who actually have some innovation ideas themselves. Not always very good at that, but we're working on it.
- Okay, fantastic. Justin Urquhart Stewart, thank you very much for joining us.
- My pleasure, Graham, thank you.