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Welcome to Mern Talks Money, the podcast in which people who know the markets explain the markets.

I'm join Stebecks, senior reporter of Bloomberg and authoring the Money Distilled newsletter.

Today I'll be covering from MERN for this special episode of the show, recorded live from the Edelmand Smithfield Investors Summit at the London Stock Exchange.

With me, it is Helen Jewel, International Chief Investment Officer of Fundamental Equities for emir at Blackrock.

Helen is over twenty years of experience in financial services, starting her career as an investment banker, following a training route into equity research at Goldman Sachs and then moving to Blackrock in twenty fifteen.

Now we're speaking at the start of December, and it's been a fascinating year for equity markets in general.

AI in US tech stocks have still hogged the headlines, but when you look at major global market performance in the year to date, he'd actually, in most cases have been better off invested in anywhere but the US.

So I wanted to grab a chat with Helen to get a sense of what's caught Harraie this year and where she thinks the best opportunities might be for twenty twenty six.

Helen, Welcome to me Earned Talks Money.

Thanks for having me.

It's very nice to have you.

So, yeah, as I was just saying there, it's been I mean I was actually looking at the figures and it's actually really been a spectacular year for markets.

I really don't think that's, you know, over exaggerating.

I think the Footsie one hundred is seen its best performance, and I mean I know that's not saying much for the foots of one hundred.

It's done its best since two thousand and nine.

So what's kind of stood out most to you so far this year?

I'm glad you said that, actually, John, because often the first question people ask me is this year it's all been about us and AI again, and I have to remind them that actually over eighty percent of major indices have reatten turned double digit returns this year, including as you say, the foot Sea, which is or the foot Sea one hundred close to twenty percent, which is incredible.

I mean that is really really strong returns.

And so the thing that has been really incredible this year is firstly the diversification of those returns, both across markets, but also across sectors as well.

Again, I think most people think that the tech sector is the one that has performed the best, and it has performed very well, but you've also seen utilities perform well.

In fact, you've seen pretty much every major sector post very strong returns, and again that has been a key detail for the market this year.

The second thing I think is worth mentioning though, is that we have seen quite a number of quite significant pullbacks.

If we go back to the start of this year, in January, we had what was termed the deep Seek moment, when suddenly people thought that maybe AI wasn't the only story in town, and there was a realization we had to be really thoughtful about what that meant.

We then, of course had Liberation Date in April.

We then saw pullbacks in the summer, which was a painful summer for many of us, and then even November saw a bit of a degrossing and a rotation.

So the second thing that has been remarkable in the markets is the number of quite significant pullbacks that you've had, but they've always been followed with a by the dip moment, and that is not something I have remembered for a long long time, if ever in my career.

Just on that point, I mean, you're absolutely right, because I mean I suppose one of the reasons a voice surprised when God was looking at the figures is you do have this abiden memory, particularly of April and Liberation Day.

I guess everyone thought at that point that, well, that's we're going to get a bit of market now.

It finally looked as if you know what, the EI story was kind of dead in the water.

It's very interesting it's come back.

Have you got any thoughts about what is driving that kind of by the Depp mentality.

Is it just been hammled inty investors heads that it's been the right thing to do for a boott in years now?

Yeah.

I mean the most important thing with the buy the dip is it is being supported by actual fundamentals.

And this is why when we think about AI, and a very common question I get asked is is there an AI bubble?

These are real earnings of real companies with real cash behind them.

And I think that is the key reason that people are staying invested in this market is that they actually see true returns from companies that have got the capital to invest, and the AI story is going to be a multi year story.

I mean, we're really really just at the beginning of it.

The amount of capital that's currently being deployed is half a trillion dollars.

That is an incredible amount of capital, about half percent I think of global GDP and again being supported by companies with real cash behind it.

So we're just at the start of that.

I think there is a second reason though, and let's be honest, there's a little bit of whether you want to call it fomo in the market or players in the market, whether it's retail investors of course, indexer investors, you've got the podshat who have capital that is invested based on momentum, et cetera.

And these participants also are participants that support the market and the construct of the market, and I think it's important that we recognize the influence those participants have, particularly after you've seen multi period returns.

So if I've made twenty percent and then twenty percent again and another twenty percent, if the market pulls back by five percent, I'm not as bothered as if I'm starting from point zero.

So the amount of capital that is in investors' pockets is also that little bit higher.

That's that's quit a big, almost psychological flow beneath the market.

I'm not just a money.

Flow exactly, and I don't think that it's very difficult for us as investors to really put a number on what that means.

I mean, ultimately, John, the market is two things.

It is the earnings that a company is going to make, and it is the multiple that people are willing to pay for that earnings going forward.

The first of those, it's our job as fundamental investors to try and figure it out.

I mean, that's what I've spent twenty five years of my career trying to understand.

The second, though, at the end of the day, is what people are willing to pay.

And this is the question for the S and P five hundred.

When it was at twenty two times, we thought is it too high?

Then it goes to twenty three, Well, what is the right number for that multiple if it continues to deliver for investors?

Yeah, I mean that's that's a good point.

I mean, I must have spent a lot of my my owing career looking at the cape ratio and kind of more recently stressing about who he is in the US, but that doesn't seem to have certainly not a timing too.

But one thing I would say, which I think, again going back to what we started with, this has kind of been the year where we've seen the rest of the world catch up with the US.

And I'm just wondered on what you think is driven that, as in way have we seen that switch and do you think that's going to continue or do you think those sectors are perhaps getting too expense of themselves, Like the defense story is an interest and one to me because that's kind of rocketed, but that is also a saense to know that maybe Germany is not going to be able to deliver.

Maybe, so I'll let you take that.

Yeah, So why is it caught up?

First off, I think really goes back to that deep seek moment.

That the deep seek moment was the moment that we realized that the US was not the only story in town.

Twelve months ago I was here.

I think we were talking about US exceptionalism all the time, and it's because the US had delivered and nothing else had.

And I think what happened with the deep seek moment is it was this realization of oh goodness, maybe when it comes to AI, it's not just about the US, and maybe in my portfolios I should have a bit more diversity other than the US.

The best thing you could have done at the start of the year would have been underweight US and overweight China Tech for that.

Month of January.

So that realization has meant that people have looked elsewhere and you've been in again this unusual situation where you have so many markets into double digits.

So the starting point has been investors looking for other opportunities outside of just that US AI bubble.

And where have they looked, Well, they've looked at generally two things, which is what investors look at.

They look at firstly, where do they think that the earnings growth is going to come from?

And that's the defense story, right, the investors saying, we believe that there's going to be this flow of capital and from the German government from Europe into defense that is going to support the earnings, so I am going to buy there.

And the second area they look at is areas they think valuations look really interesting, so they go, okay, what looks relatively interesting, And in Europe, the banks has been the key area that that has been true for They look relative to their history pretty cheap.

We think these are really strong, good companies that restructured post the financial crisis.

They're going to return capital to shareholders.

Let me go there, And it's just what you would do if you're buying a house, right, if you're buying a house from an investment perspective, you either want to go somewhere that looks pretty cheap and really good value, or somewhere where you think is really up and coming and there's going to be future earnings.

It's the same mentality.

So then that goes for where next, where it's the same mentality still, where do we think the earnings are going to be and where it still looks good value now earnings wise, the defense maybe has a bit further to go, but it's probably not the dominant story to me.

The dominant story in twenty six is going to be, you know, the energy solution providers, and that's where Europe can actually be really, really good.

That's interesting so because obviously you know, looking at we ad highs like this year, energy does come up, although I'm assuming that that is mostly the force or fuel said, because I think clean energy's done reasonably well this year, so weird as it you think the money's going to be cheasing next year.

Yeah, So three things, And actually, interestingly, the energy stocks have not done badly this year.

The oil price.

You've seen a separation between the oil price and energy stocks, which is pretty interesting.

Part of that is geopolitics, but part of that is also the recognition that actually demand is going to be more resilient than people thought for the fossil fuels.

So fossil fuels have done okay.

Clean energy has already started to do well, but definitely has got better.

But let's put it into three camps.

If you need energy, and you need energy.

A lot of it is driven by AI.

So so much from the AI perspective is AI need energy to work.

There's also things like air conditioning, but AI seems to be the only thing we talk about that is the dominant, dominant driver.

So what do you need?

You need companies that can provide the energy, and it doesn't matter where that energy.

Really comes from.

It can be fossil fuels, it can be clean energy, but you need energy.

Number two, you need that energy to be efficient.

So companies that are supporters of energy efficiency.

And thirdly, you need the energy to get to where it needs to go, so network companies.

So that's three buckets which are all kind of part of the energy infrastructure.

Anyone who provides the nuts and botds for wind turbines, anybody who provides solutions for energy efficiency, and anybody who provides the network for actually getting the energy to where it needs to be.

And of course the data centers for storing the energy where it needs to be.

They are going to be the real winners energy.

I think John is going to be the real constrainer for AI in twenty six.

Yeah, I mean, yeah, that makes an awful lot of sense.

There's a limit to him in the specific company.

But what's a good example of a company or an area, like an example rather than rather than a TEP as it will.

Yeah, So a good example is in the German industrial space.

So the German industrial names have got some really interesting names within their semens energy for example this one, and it's done very well.

So again these are not these are kind of about having more.

Again from a network perspective, you've got names like Ebadrola in Spain, SSEC here in the UK recently did a capital race.

These are really interesting names and interesting companies because they are providing a solution to something that the world needs right now and ultimately bringing it back to one oh one.

And as you said at the start, I spent a couple of years in training, and in training, what you were kind of telling people is, look, this isn't This is about looking at companies that have earnings.

Earnings is revenue less costs.

Revenue is driven by providing things that people need, Things that people need or want, is solutions, solutions that solve things that people are looking for.

And right now we have got a need for more energy, driven by AI, driven by air conditioning, driven by just the way we're living our lives.

At the moment, we're.

Going back to the EI because and talking about the capital spend.

And I radther very interesting piece from calf Cal a couple of weeks ago, and it kind of made a point I must have I hadn't really thought about because everyone kind of lazily compares this to the dot com bubble.

And one thing that this chat was making the point was that, well, I say the dot com bubble, once these companies were established, the marginal you know, cost of sales was basically free and so everything went to pure profit, whereas AI seems to have this ongoing capital intensity where you know, you're trying to keep up with your rivals, you need to buy the next hot in the video chip, that sort of thing.

Is there a point where we kind of run out of road slightly and you know, it's good, We're building out all this infrastructure, but then everyone goes, oh wait, I'm where's the actual money coming from to pay for all this.

I'm just curious what your take has on that element.

I mean, that is something that people worry about.

But the reason I think we shouldn't worry is that.

And I think it's as you say, where AI is is a little bit different to dot com.

AI is transmission across many different things.

It's not just about the consumer.

It is about defense, for example, it is about government security.

So when it comes to AI, there is the two things.

There's the one that you touched on, which is that circularity of the more chips you need, or the more chips you have, the more AI can do.

The more AI can do, the more chips you need.

So you've got that circularity of growth in the chips, which is important.

The second thing is this is bigger than just being able to buy things on your phone.

This is about needing this for security from a geopolitical perspective as well.

And that's probably the thing that we don't talk about quite enough.

If and it's a very big it's hugely unlikely, but the hyperscede has ever decided actually tomorrow this is done.

We're not spending I am confident that governments would step in that they need to, that they can't not be part of this story because this is so important.

It's going to be part of defense, it's going to be part of national security as well.

The AI story is much much better, bigger than just being able to do the Christmas quiz via chat GPT absolutely answer.

So I see your business in there's a kind of tax payer put under the sector to a certain extent, that's what that's interesting.

But you're already seeing it, right.

You go over to different countries and you know, we're already starting to see it here in the UK.

You go in and it's face recognition at passport control, it's those things.

If you're not investing in those things, and those things are all kind of the part of AI.

I mean, these are all AI constructs.

If you don't do that as you're going to be left behind.

So it's not just about the companies, although the companies obviously are the drivers and the nuts and bolts of all of this.

Again, the companies are the solution providers and and understanding who are providing the solution that people and by people.

It's consumers, it's governments, it's everybody need that.

That is That is our job and that's why I love it, John, That's why it's so interesting to me every single day because it's thinking who is going to be providing the solution going forward?

Okay, and so in terms of the best play on AI next year, I get the film and you're basically saying the energy is a good point because it's semi decent valuations and it's definitely going to be needed.

That makes a lot of sense in terms of because going back.

To that in Europe, John's a little bit biased, if you don't mind me saying that.

You know, I love anything that has a much bigger European tilt to it.

So you know, there's some really interesting European companies in that space.

That's forgivable.

Giving your job title actually on that point.

So obviously the other one that has kind of rocketed because I was looking at the Spain for example, and one thing that caught my high a couple of weeks ago when I was writing about it, and obviously the Spanish market is not one to pay a lot of attention to, but I was looking at it was going, my goodness, that is an awful lot this year.

And then you can look at it and it's like what was basically the banking sector that's driving that.

And it's the same way the Italian market has gone up a lot because the banks have rocketed.

And even in the UK, I mean Lloyd's is up a lot this year.

I think that West was up a lot kind of last year.

Are the banks still or not all?

Do you think what is that sort of like kind of rapen And.

No, we still think the banks are on a roll and we remain overweight HSBC and again in the UK and are the big performer this year.

So why are we so positive on them?

Even when they've gone up?

The valuations although they are higher than they were a year and two years ago, they are still not particularly excessive versus history.

So that is number one.

Number two, they are a set of companies that have resilience in their earnings.

And people think so much just about the interest rate, And of course the interest rate might come down a little bit, but it was only going to come down a little and we're still in the kind of a good spot for banks.

More importantly, for banks, it's about the loan growth.

And what you're seeing is you're seeing corporate balance sheets in strong place.

You're seeing consumers in a strong place, and that is really supportive for the banks.

And the third thing I would say, and I don't think European banks are given enough credit for this post the finalancial crisis, they did really think about how they were capitalized and how they were structured, and as a result of that, we think in the next three years that they're able to return up to twenty five percent of their current market cap to shareholders in either dividends or share buybacks.

So that's a pretty nice space, right You buy something feeling confident that you get to get twenty five percent back even if nothing else happens, and the likely it is something else is going to happen.

So European banks remain a key part of our portfolios at the moment.

I mean it's interesting because I would say, and I don't know what your thoughts are, but one thing that did stand doing to me about the budget recently, and I guess a positive sense, was that the Chancellor minds to resist all pressure put another tax on the banks.

And also, you know, the consumer of car lawing kind of issue.

Seems they have been downplayed in the way that the PPI kind of scandal war isn't.

I think it almost feels as if and I don't know if you agree that the banks have kind of come off the naughty step in the last twelve months, certainly in the UK and also seems to be happening in Europe as well.

So I guess maybe we've not got that same post financial crisis can anger at them to an extent.

Yeah, No, I think it's certainly eased.

And I think when you look at the returns that these companies have had, they're so relatively mundane versus some of the other companies.

I mean, the question actually bringing it back to that AI story and kind of it's got so far that we need to get to.

I was listening on the way into the radio and obviously in Australia.

You're starting to see changes being made there as children can't use social media et cetera.

That is going to be the interesting next step.

I think it's not going to be about the banks again, that's quite I think it's more likely to be about for AI.

What does that mean from a social perspective.

It's going to be really interesting, But that I think is going to be much more the focus than the banks.

That is interesting because yeah, because one thing we have been talking about for a long time is when is the backlash against the big tech company is going to come about?

And I know that's an idea that's been bubbling under for several years.

But that's really interesting you raise that then, because it almost feels as if that has starting to happened.

People are getting more and more concerned about what social media is perceived at least to have done to you know, the children's brains and things like that.

So I okay, that's so that's a kind of possible risk for the tech sector next year.

Perhaps it is, but again our job is to think about how do you turn that into something more tangible.

Backlash can be words, but a backlash can be actions and at the moment until you know more about actions.

I think it's yeah, I'd.

Love over a beer to chat more about it.

But from it from an investment perspective, you're just guessing.

And in terms of sectors for next year that you're perhaps less keen on are ones you would just not be as in through yas to go about any standout as being either the two expensive or there's just nothing going to happen there or anything you would basically avoid.

Yeah.

The one area that unfortunately still struggles is the auto sector in Europe.

It is under a huge structural pressure obviously where you've seen tariffs coming in and that has put it under pressure both directly and obviously indirectly through other countries now having cheaper vehicles that they can export it to Europe.

So it pays me to say it, but the European auto sextor is one that we remain underweight.

It feels a little bit of a value trap at the moment.

And in terms of the individual countries, are there any fever over others or is that not really how you think about the European market.

It's a bit like you say, when you get too much in the European market.

You're really looking at companies.

So Spain is great, but Spain is great because it's got fantastic banks and utilities.

I would say, as I mentioned with.

Ebidroler earlier, the one area as we are sitting here in pattern not to square that this worth is mentioning is the UK small cap.

So the UK small cap has been unloved and undervalued for a period of time now, and you know, the budget last week perhaps provides a little bit more stability.

Obviously one of the things the chance he's trying to do is get people investing more in the UK and if people invest, they tend to invest.

In their home country.

We've got great small cap companies in this country and the valuations of some of them are incredibly interesting.

So we remain long term positive whilst recognizing that structurally it's been a very difficult place over the last couple of years.

I mean, that is interesting you to bring that up, because I perfectly think about valuation without worrying too much about catalysts.

But obviously small caps in the UK have been struggling for a long time.

Is that anything you see that may actually make that kind of start to go awi in twenty twenty six, because obviously even the footy two fifty has had by compartison a buy eleven percent would not be a pretty decent year.

So I'm just cursed to see what you're thinking that.

Yeah, I don't think there's a one clear catalyst, which is a real shame because if there was, I would be absolutely pivoting all in.

I think maybe what we are going to see is again this understanding that you need to broaden out portfolios exactly what we've seen this year.

Now.

At the start of the year, that felt easy in inverted commas because you had these pockets that had not performed well.

Now of course it's more difficult because you have more pockets that have performed well.

So maybe what that forces is it forces investors to go further afield to find those pockets that still look relatively cheap and relatively interesting.

That's the hope that I have, But maybe that's my hope in a slightly biased opinion, but it would be lovely if they did.

And I think what you will see, because the equidity is relatively low, you do start to see these virtuous cycles.

Once it happens, people think I've missed out here and we go.

So I would love love to see that happen and hope right it could be a hope for twenty twenty six.

Hope I like that.

I mean honestly, I think people were were great to be disappointed with the budget that said, do you think that the three year stamp duty holiday may bring a couple of big get apos here that we're looking elsewhere and perhaps now you think, oh, I sually maybe we can choose London or at least dual less than London or something like that.

Is it going to move the needle at all?

I think what it shows is a real try, a support you know, a kind of desire of a government to say we want to help make this happen.

And I think that is important.

But let's be honest, the thing that is the most important thing of all is the valuation level.

So actually what is more likely to be supportive is again that foot sea starting to move up, and the foot sea and people thinking if I list here, my opportunity for re terms is just as great as if it was elsewhere.

That is the big deal mover.

But having a supportive government it can't help in terms of a government.

That's basically indicating to the world market, we want to make it easier for you to list in the UK.

Yeah, what's the biggest risk you see for twenty twenty six, Because obviously this year there was tartiffs, there was the you know, bind market was going to blow up at any point, and neither of those things have actually really done the damage that perhaps people were worried that we're going to do.

What do you think the potential kind of thing you keep an eye on ers for next year.

I think the biggest risk is actually complacency driven by those couple of things that you've seen.

And although the macro does look okay and decent, you know, we are starting to see a little bit of softening of job data in the US.

At the moment, we're still in that bad news is good news because then the FED is more likely to cut.

But if we get too complacent and we don't think about, you know, the impact of maybe stickier inflation on jobs, on stick of inflation on consumer confidence, that is the big biggest concern that I would have that actually what you see is this kind of creep of things not getting terrible, but kind of just getting a little bit worse and a little bit worse, and again all of this comes back to the market is driven to a certain extent by the multiple that people are willing to pay, which is driven a lot by the confidence they have in the underlying economies.

So my biggest concern, and it's not a big bang answer, I don't think, you know, there will be certain things that we haven't even thought about yet.

I mean, twelve months ago, I didn't know, you know, deep Seek was a thing that was going to kind of blow up in January.

But that kind of creep of nervousness that that is something that I am keeping a real eye on because I worry that we've become complacent John, you know, the concerns we have went away.

Everyone just kept buying the dip, and therefore we end up in a situation where we just almost don't even look at things that we should as investors be continually looking at.

And there on the glass half we'll say, there's an anthing you see as being a big poison to surprise that could happen, something that may engender more confidence that we're not really thinking about.

That's a really good question, I think, because we've all been so positive.

We probably are thinking about all of the good things that might be likely to happen.

But I think maybe one of the things is the element of Again, I don't want to sound boring always bringing back to this energy story, but the ability of the human being to continually solve the issues that are coming up in the world.

It's not necessarily a big bang surprise, but I think the resilience of us as humans.

Again, if you think about the market, if you think about Liberation Day, Liberation Day was such a big day in the markets, but actually very quickly companies adapted, government's adapted, people adapted, And I think giving ourselves a little bit of a pat on the back for that and recognizing the ability of humans to respond well is a good thing.

And then you know, maybe obviously from a other perspective, that there's a lot of geopolitical issues that continue.

Seeing those move through and resolution of some of those is always obviously helpful for markets, if more importantly helpful for humans.

Yes, quit so was saying by energy, stick with the banks, avoid cars.

Anything else was loxuredly sick.

That's the one other You.

Saw my finger come up if we were being recorded and buy energy.

To be very clear, let's let's kind of scope that out everything energy, because I think people when they think about that, they just think about the oils in one segment, all energy solution providers by banks, and then actually for luxury, I'd actually broughten it out to quality growth in Europe.

Quality growth in Europe, and by that I mean they're really good European companies that again have resilient earnings, they have strength in their balance sheets.

These companies have not actually had a great year.

And the reason I've not had a great year in Europe is a weakening dollar and the tariffs, and most of them are exporters.

Those two things combined have really put pressure and nervousness on those companies.

So they include names in the luxury good space like LVMH, names in the semiconductor space, names in the data providers a space, and the solutions space software space, which often have just been kind of actually downgraded quite significantly in investor minds.

Those as a group of companies have not had a great year in Europe.

But when we see more stabilization in terms of currency, when we see obviously the tariff resolutions starting to come through, I think they're a really interesting group of companies.

Perhaps being selective though always good for me to throw in a recommendation for active investing in that space to really understand the winners versus the losers.

So you have to be pecky.

So we can't just buy a track I find is that they hate it, not a.

Track of fund for quality growth.

Quality growth is exactly the kind of area that you want to play selective and active.

Very good, Well, listen, that's been really helpful here, and I think we've got a good all review of what we need to be looking at for next year.

I'm going to ask a usual end question, but before I do that, is it anything else specific that you wanted to bring up that you feel that havn't covered, that we haven't covered.

The one thing I perhaps is is and ask that all the listeners.

AI and ai Us is such an interesting story that, as we say, we could talk about entirely just about that.

But just because that's the story that is dominating the headlines, don't forget that there is still really interesting returns happening in many other parts of the market.

So diversifying portfolios is not just about moving away from a dominant risk in portfolios and feeling you've got to give up returns to do so.

It's absolutely not the case.

You can diversify portfolios in a really sensible way and also.

Maintain those returns.

So don't let the headlines grab how you allocate portfolio one.

Listen to the headlines?

Can you trust journalists?

Terrible?

So for Christmas, which book have you read this year that you would see with make an excellent gift?

Oh well, it's a great question, and I'm going to say the one that's best for a gift because it's a brilliant book.

It's a fiction book Frederick Backman called My Friends.

I love that author, and it's a really really good, really enjoyable, really heartwarming, readable book.

So as a gift, definitely do that.

The second one, if I can have two, which is probably less good as a gift, but it's really really interesting.

It's called Being Mortal by A Gandhi, and this is really about how we think about death and dying.

So probably not the best thing to give us a gift, but certainly one that I would recommend reading it.

It really gets you thinking, which is all that you can ask for from a book.

So one that's heartwarming, one that gets you thinking, one that is a gift, one that's a by yourself.

It was a good choice.

Diversification everywhere you see.

Well look.

Thanks very much, Helen, really appreciate your time.

Thanks John, great to be Hey, Thanks for having me.

Thanks for listening to this week's Merton Talks Money.

If you like a show, rate the view and subscribe wherever you listen to podcasts, and keep sending questions or comments to Merron Money at Bloomberg dot net.

This episode was hosted by me Join step Beck.

You can also follow me on Twitter or x I am at Join Underscore step Beck and Meron is at Merton sw This episode was produced by some of Sadie and Wasis and Am sound designed by Blake Maples and special thanks to Helen, Joel Edelman, Smithfield and the London Stock Exchange