James
Gard:
There’s
already
so
much
going
on
with
geopolitics
and
markets
at
the
beginning
of
the
year.
Luckily,
I
have
with
me
Michael
Field,
who
is
going
to
explain
what’s
really
going
on.
Last
time
we
spoke,
Michael,
markets
were
already
pivoting
towards
the
idea
of
rate
cuts,
and
there
was
a
feeling
of
exuberance.
That
just
seems
to
have
vanished
within
a
matter
of
weeks.
So,
what’s
really
going
on?
Michael
Field:
I
think
the
market
rally
that
we
saw
in
December,
as
strong
as
it
was,
and
it
contributed
heavily
to
the
returns
that
investors
got
last
year,
was
pretty
fickle
in
origin.
It
was
very
much
sentiments
driven.
So,
people
saw
this
upside
of
interest
rate
cuts,
and
they
got
slightly
ahead
of
themselves
towards
the
end
of
the
year.
And
a
lot
of
people
thought
this
might
carry
over
then
into
2024,
but
suddenly
that
kind
of
enthusiasm
has
faded.
And
that’s
what
happens
when
you
have
rallies
based
on
non-fundamental
things.
They’re
quite
fickle
and
they
fade
off
again,
and
that’s
the
current
situation
we
find
ourselves
in
now.
Gard:
Sure.
It
seems
a
bit
early
to
write
off
the
markets.
I
had
a
commentary
this
week
saying,
hopes
of
a
better
year
for
the
FTSE
100
are
diminishing
already.
I’m
thinking
it’s
a
bit
early
in
the
year
to
start
trying
to
–
I
mean,
we’re
in
the
market
of
making
predictions,
but
it’s
a
bit
early.
It’s
only
kind
of
two
weeks
in
the
trading.
I
read
a
piece
that
you’ve
written,
and
you
were
saying
that
investors
are
just
going
to
have
to
be
patient
in
terms
of
sustained
returns.
And
if
there
isn’t
a
huge
rally
in
January,
it
doesn’t
matter
a
huge
amount.
Field:
I
think
that’s
fair.
Yeah,
the
message
hasn’t
really
changed
from
that
perspective.
Ultimately,
you’re
investing,
and
you
should
be
investing
based
on
fundamentals.
Now,
for
the
market
itself,
we
think
the
market
is
kind
of
roughly
fairly
valued.
But
within
that,
there’s
various
sectors
and
subsectors
that
are
really
undervalued
that
have
a
lot
of
opportunities
at
the
moment.
So,
if
you
want
to
be
long-term
in
that
perspective,
you
really
have
to
get
it
dig
in
deep,
find
those
sectors
that
are
undervalued
and
then
invest
and
not
expect
a
swift
return
on
your
capital,
but
expect
that
over
time,
that
story
will
play
out
and
ultimately,
you’ll
get
the
reward
for
your
work.
Gard:
Sure.
In
terms
of
geopolitical
risk,
one
thing
I
hadn’t
seen
coming
at
the
end
of
last
year
was
the
issues
in
the
Red
Sea
and
the
shipping
disruption,
and
even
today,
rockets
fired
between
Pakistan
and
Iran.
I
mean,
it
seems
to
be
that
investors
have
a
new
thing
to
worry
about
every
month.
This
is
just
normal
now,
isn’t
it,
for
the
markets?
Field:
We’ve
had
periods
in
history
where
there’s
been
a
lot
happening.
And
I
think
we
were
just
lucky
in
that
we
probably
had
a
10,
12-year
period
thereafter
the
financial
crisis
when
the
geopolitical
crises
that
we
faced
were
kind
of
fewer
in
number.
And
now
suddenly,
we’ve
been
hit
with
a
lot
since
the
pandemic,
the
Ukraine
war,
the
Red
Sea
issues
now
that
we’re
facing.
The
difference
really
is
how
many
of
them
have
a
real
material
impact
immediately
on
markets
is
the
other
question,
right?
When
the
whole
Israel
war
kicked
off
a
couple
of
months
ago
now,
we
did
some
analysis
on
how
many
stocks
were
affected.
And
in
the
scheme
of
things,
if
that
conflict
stays
isolated
to
that
region,
there’s
little
impact
on
Western
markets.
But
as
you
said,
the
more
things
happen,
the
Red
Sea
crisis,
if
other
things
like
Iran
and
Iraq
and
things
like
this
start
flaring
up
again,
obviously,
that
has
a
much
bigger
global
effect.
We’ve
spoken
about
defence
stocks
as
well
and
the
structural
growth
story
there.
So
certainly,
there’s
knock-on
impacts,
but
it’s
important
to
look
at
these
things
one
at
a
time
and
really
assess
how
much
material
impact
each
of
them
have,
I
think.
Gard:
Sure.
They
may
have
a
cumulative
effect
at
some
point
where
the
markets
say,
look,
we’re
taking
geopolitical
risks
seriously.
But
with
every
crisis,
there
seems
to
be
an
immediate
reaction
and
then
return
to
normality.
Another
story
that
perked
up
since
we
last
spoke
is
inflation.
And
I
wasn’t
hugely
surprised
to
see
U.K.
inflation
back
up
this
week.
I
read
headlines
today
about
inflation
shock.
The
U.S.
has
seen
it,
the
Eurozone
has
seen
it,
and
now
the
U.K.
has
seen
it.
How
do
market
participants
change
their
view
of
this
year
based
on
where
they
think
rates
are
going
and
inflation
sticking
around?
Field:
So,
I
think
the
first
thing
is
to
put
it
in
context,
right?
The
U.K.
had
11
months
of
declining
inflation
and
inflation
fell
from
10%
to
4%
basically,
which
in
the
scheme
of
things
is
a
great
result.
I
think
we
all
would
have
taken
that
at
the
beginning
of
the
year.
I
think
the
shock,
if
you
will,
as
you
put
it,
to
markets
is
that
it
didn’t
decline
in
December.
It
actually
went
up
10
basis
points,
which,
yes,
it’s
disappointing
if
you’d
expected
that
straight
line
decline.
But
in
the
scheme
of
things,
does
it
change
the
picture?
Not
massively.
Ultimately,
our
view
of
inflation
is
like
this.
Inflation
has
come
down
an
awful
lot,
which
is
great
for
markets
and
should
help
certain
sectors
of
the
economy
at
least
this
year.
And
it
should
help
consumers,
right?
Their
belts
have
been
tightening
for
a
while
and
this
should
take
some
of
the
pressure
off.
But
at
the
same
time,
inflation
is
still
twice
the
level
of
the
Bank
of
England
or
the
ECB’s
targeted
rate.
So,
from
that
perspective,
there’s
a
lot
more
to
go.
So,
it’s
not
mission
accomplished
yet.
It
doesn’t
mean
immediate
rate
cuts
either.
So,
there’s
a
bit
to
factor
in,
but
certainly
we’ve
had
a
lot
of
progress
in
inflation.
That
shouldn’t
be
dismissed.
Gard:
Sure.
Yeah.
If
you
look
at
the
trend
line,
it’s
been
a
big
lurch
downwards
and
a
little
tick
up
rather
than
a
big
reversal.
Just
sticking
with
the
theme
of
the
consumer,
I
mean,
earning
season
already
kicked
off
in
the
U.S.
and
it’s
about
to
in
Europe.
You
think
that
consumer-facing
companies
are
going
to
have
a
tough
time.
I’ve
already
noticed
three
profit
warnings
so
far
in
the
U.K.,
at
least
–
Burberry,
which
is
luxury
exposure;
Crest
Nicholson,
housing
market;
and
PageGroup,
which
is
recruitment.
So,
they’re
all
different
sectors,
but
they
all
have
an
overarching
consumer
link.
You
fear
for
consumer-facing
companies
in
this
coming
earnings
season.
Field:
To
some
degree.
It’s
the
sector
that
we’re
saying
that
you
should
expect
differing
results.
Some
of
the
companies
are
still
managing
to
fend
off
inflation
and
pass
through
price
increases,
and
some
of
them
are
struggling
at
this
stage.
They’ve
been
passing
through
maybe
double-digit
price
increases
for
two
years
now
to
consumers.
And
a
lot
of
consumers
are
simply
that
stretched
that
they
can’t
afford
anymore.
I
think
the
three
companies
that
you
said,
yeah,
you’re
right,
they
all
differ
in
terms
of
the
industries
that
they
are
involved
in,
but
they
have
one
common
link,
that
they’re
all
at
the
cold
face,
be
it
a
luxury
goods
firm
that’s
dealing
with
end
consumers,
be
it
a
recruitment
company,
which
we
all
know
are
highly
cyclical,
or
a
house
builder
also,
they’re
very
much
at
the
cold
face,
they’re
very
much
seeing
the
impacts
of
high
interest
rates
and
high
inflation
to
some
degree
up
to
now
as
well.
So,
I
think
what
consumers
–
or
what
the
investors
rather
are
maybe
missing
is
that
yes,
the
picture
looks
brighter
in
terms
of
interest
rates
coming
down
from
here,
but
the
fact
that
interest
rates
have
been
really
high
for
a
little
while
now
means
that
that
still
has
to
feed
through,
and
that
can
mean
more
pain
for
the
next,
call
it,
six
months
before
we
see
any
kind
of
upside
again.
Gard:
Sure,
that’s
interesting.
This
is
my
favourite
earnings
season
because
it
covers
a
whole
year
period
for
a
lot
of
companies.
So,
you
get
a
better
picture
than
say
Q3
earnings.
But
as
you
say,
what
investors
really
want
to
know
is
forward-looking
stuff.
They
don’t
necessarily
want
to
know
what
you
did
last
year.
They
want
to
say
–
you
want
them
to
say,
look,
things
are
getting
better.
But
you’re
kind
of
suggesting
that
investors
need
to
just
wait
a
bit
for
inflation
falls
to
pass
through,
consumers
to
feel
a
bit
better,
and
it’s
a
gradual
process
rather
than
immediate
one.
Field:
I
think
that’s
a
pretty
good
conclusion,
yeah.
And
if
you
look,
as
you
said,
it’s
forward-looking.
And
for
a
lot
of
these
companies,
the
visibility
is
relatively
low.
They
can
only
tell
you
what
they’re
seeing
perhaps
over
the
last
few
weeks.
Recruitment
companies
generally,
I
know,
having
covered
these,
their
forward
visibility
is
a
maximum
of
about
six
weeks.
So
yes,
it’s
interesting.
Yes,
it’s
good
to
take
it
into
account.
But
if
you’re
a
long-term
investor,
you
really
need
to
have
your
own
view
and
supplement
that
with
what
the
companies
are
seeing
right
now,
rather
than
just
take
exactly
what
they
say
and
extrapolate
that
into
the
future.
Gard:
Sure.
Yeah.
Burberry
is
an
interesting
case
of
that
because
it
was
quite
a
significant
profit
downgrade.
I
don’t
necessarily
want
to
talk
about
Burberry
in
detail.
But
do
you
expect
earning
seasons
to
be
full
of
those
nasty
surprises
for
investors?
And
the
last
earnings
season,
we
had
some
big
share
price
falls.
So,
are
investors
better
prepared
for
nasty
surprises?
Or
is
it
going
to
be
like
10%,
20%
share
price
falls
on
the
day
sort
of
thing?
Field:
I
think
you
could
see
a
little
bit
of
that.
I
think,
yes,
investors
should
be
prepped
for
more
surprises.
But
at
the
same
time,
it’s
difficult
to
know
exactly
what
to
expect.
And
there’s
so
many
moving
parts,
right?
So,
you’ve
got
some
companies
benefiting
from
falling
inflation.
Some
of
them
will
be
able
to
hang
on
to
those
price
increases
while
benefiting
from
lower
cost
bases,
which
then
you
could
see
profits
rise
for
some
industries.
And
some
are
really
going
to
struggle
to
pass
on
those
increases.
And
then
others
are
paying
really
high
debt
payments.
And
perhaps
they’ve
had
to
refinance
towards
late
last
year
or
something
like
this
too.
So,
it’s
going
to
be
very
mixed.
And
I
think
investors
won’t
know
exactly
what
to
expect
from
each
company.
So
certainly,
on
the
day,
you
should
expect
some
surprises.
I
won’t
be
surprised
if
we
see
some
reasonably
large
share
price
moves
as
investors
struggle
to
adapt
immediately
to
the
new
conditions
for
these
companies.
Gard:
Sure.
Yeah.
I
mean,
it
makes
for
good
copy
for
journalists
necessarily,
but
it’s
an
unpleasant
experience
for
investors.
You
mentioned
debt
there.
That’s
quite
an
interesting
element
to
it.
Because
I
remember
going
into
COVID,
the
heavily
indebted
companies
were
seen
as
pariahs
and
they
spent
ages
trying
to
clear
up
their
balance
sheets,
rights
issues,
all
that
sort
of
thing.
Do
you
think
companies
are
now
more
in
better
shape,
more
resilient
financially?
I
mean,
their
borrowing
costs
haven’t
really
budged.
I
mean,
they’re
still
really
high,
right?
Field:
Okay,
there’s
a
big
difference
here
as
well
between
–
and
this
is
why
valuation
has
moved
for
maybe
large
cap
stocks
and
there’s
a
bit
of
a
gap
between
them
and
mid
cap
and
small
cap
stocks.
Because
a
lot
of
the
large
cap
stocks
have
very
strong
access
to
capital
markets,
both
in
equity
perspective,
but
also
debt
markets
that
I’ve
seen
some
companies
that
I’ve
covered
issue
debt
in
the
last
year
at
government
levels
or
even
slightly
below
government
bond
yields.
So,
they
haven’t
really
budged
and
a
lot
of
them
have
staggered
their
debt
over
a
number
of
years.
So,
their
actual
financing
costs
aren’t
huge,
but
a
lot
of
the
smaller
and
mid-sized
companies
haven’t
had
that
luxury
and
have
had
to
refinance
as
and
when
they
needed
it
in
maybe
a
less
organized
fashion.
And
then
suddenly,
they
might
be
dealing
with
higher
debt
costs
for
a
year
or
two
before
that
smooths
out
again.
So,
it
could
make
a
great
deal
of
difference
for
some
of
those
small
or
mid
cap
companies
rather
than
the
large
cap
companies,
perhaps.
Gard:
Sure.
That’s
interesting.
A
completely
different
profile
of
debt
there.
But
I
guess
they’ll
be
looking
for
interest
rate
cuts
more
than
most,
but
they
might
have
to
wait
a
bit
longer
for
that.
If
you
don’t
mind,
we
go
on
to
sectors
as
a
last
bit
of
our
conversation
really.
Just
looking
at
your
most
recent
note
on
what
you
think
of
undervalued,
say,
utilities,
healthcare,
consumer
defensive
and
communication
services,
that’s
quite
a
wide
range
of
companies,
but
which
sectors
are
you
particularly
keen
on
for
this
year?
Field:
Yeah.
Well,
I
think,
first
of
all,
it’s
good
to
have
so
many
opportunities
that
are
undervalued
still,
even
though
markets
are
fairly
valued,
which
is
an
interesting
one.
I
think
even
just
picking
a
couple
of
them,
so
consumer
defensives,
I’m
as
surprised
as
anyone
that
it’s
trading
at
a
pretty
good
discount
to
where
it’s
supposed
to
be.
A
lot
of
these
companies
have
structural
growth
stories,
they’re
very
defensive
over
the
longer
term.
Some
of
them
are
struggling
now
a
little
bit
after
two
years
of
really
high
inflation,
but
longer
term,
they
tell
a
very
good
story.
And
then
within
that,
you’ve
got
names
like
Anheuser-Busch,
one
of
the,
if
not
the
largest
alcohol
beer
manufacturer
in
the
world
that’s
trading
at
a
pretty
sizable
discount
currently.
Investors
just
aren’t
100%
sure
that
there’s
a
volume
growth,
that
consumers
are
cash
strapped,
et
cetera.
Then
things
like
Nestlé
as
well,
the
kind
of
flip
side
of
that
but
in
terms
of
other
consumer
goods,
again,
trading
at
a
discount
to
where
we
think
it
is,
and
a
pretty
rare
discount
at
that
as
well.
So,
there’s
some
opportunities
in
real
household
names
that
you
might
not
have
thought
there
would
be.
And
then
perhaps
the
other
one
is
then
in
healthcare.
It’s
really
bifurcated.
So,
there’s
a
big
investor
focus
on
the
obesity
drugs.
You
had
all
that
fanfare
last
year
about
obesity
drugs
and
the
impact
that
would
have
on
the
industry,
and
maybe
on
other
industries
like
snacks
and
things
like
this
as
well.
But
there’s
other
industries
within
that
as
well,
within
the
healthcare
that
have
been
overlooked.
So,
we
think
second
generation
beneficiaries
of
these
obesity
drugs,
like
Roche
and
Pfizer
are
materially
undervalued.
And
then
some
of
the
names
that
were
heavily
involved
in
the
COVID
vaccine,
like
Moderna,
for
instance.
Again,
these
names
have
been
overlooked
by
investors
who
have
somewhat
lazily
bracketed
them
as
a
specific
segment
related
to
only
COVID
and
are
ignoring
the
bigger
pipelines
that
many
of
these
companies
have.
Gard:
Sure.
Brilliant.
Well,
thanks
for
that
summary.
Let’s
catch
up
next
month
and
we
can
pour
over
our
earnings
season
to
see
the
winners
and
the
losers.
So,
thanks
so
much
for
your
time,
Michael.
For
Morningstar,
I’m
James
Gard.
