The London South East, Investing Matters Podcast, Episode 32 feat. Simon French

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18th January 2023

Listen to the podcast featuring our Chief Economist & Head of Research, Simon French, as he talks with Peter Higgins about the importance of high quality research for economic efficiency, health of U.K. capital markets, the privilege of leading an equity research team & the social licence of financial markets.

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Transcript of the podcast

LSE 00:01

You are listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice so please do your own research.

Peter Higgins 00:17

Hello and welcome to the Investing Matters podcast. My name is Peter Higgins and today I have the huge privilege of speaking with the hugely talented and sought after thought leader, Simon French. He is Panmure Gordon’s Chief Economist, Managing Director and Head of Research. Hello, and welcome, Simon. How are you today?

Simon French 00:39

Hello Peter, thank you for having me on the podcast. I’m very well. Thank you looking forward to a festive break in not too short order.

Peter Higgins 00:45

Yes, it has been a long and turbulent year, hasn’t it?

Simon French 00:49

It certainly has, I was doing some prep for this podcast earlier. And it looks like $38 trillion has been wiped off global capital markets this year. That’s a pretty painful backdrop for investors at whatever level.

Peter Higgins 01:01

Absolutely, we’ll touch on maybe touch on that 38 trillion a bit later on. Thank you ever so much for coming on. I know how busy you are. And I know that you’re ready to get away from the city and just have a bit of time out with your with your family. So I’m conscious of just getting into these questions with you. So I’m going to start with setting the scene if I may, for our global audience of professional institutional private investors. Michael Korda, the English novelist wrote, “success has always been easy to measure. It is a distance between one’s origins and one’s final achievements”.

Given that quote, please, would you be kind enough to share with our audience a brief overview of your origins and your journey? Earliest interest in maths, economy, economics as a young person?

Simon French 01:47

Oh, wow. Look, I’m delighted to share that albeit, I’ll let listeners and viewers judge whether it’s an interesting backstory.

I was born 40 plus years ago in Hull in East Yorkshire, and was always fairly mathematically interested.

Wasn’t always the most talented particularly in the early years, but I love those, those so it was predated Sudoku, but those little sort of quiz books sort of number based sort of cross between a crossword and the Sudoku.

And therefore I sort of thought that something mathematical would end up being the type of thing I’d have had a passion for, and having gone to school in Yorkshire and latterly, in Derbyshire, I spent four years are very happy is in County Durham, Durham University, studying economics and then economics and finance, and then joined the civil service as an assistant economist on their Fast Stream Programme back in 2002. And worked initially as a labour market economist working on migration issues, childcare issues, pensions issues, and then following 2008 moved more to the central government to the cabinet office. As it became apparent the central government needed in more economic and analytical thinking.

Very happy period, about six years there and in 2014 I moved to the private sector, to Panmure Gordon, my current employer where I’ve been for the last eight years, initially as UK economist and now as chief economist and Head of Research and that journey, look at others have in my profession have escalated to Chief Economist status to big institutions faster than I but I did feel if I can make one reflection on my journey, I did feel that the formative years I had in the early 2000s in civil service, where whatever one’s views of the public sector, it provides you initially with the ability to get a really broad understanding, certainly the Fast Stream Programme for graduates a broad understanding of the quantitative methods required to be an economic adviser and economist and also some of the softer skills of engaging with senior stakeholders, with ministers with senior officials.

And that has been invaluable as my career has developed and I’ve changed sectors to be able to take those same skills and apply it to other parts of the economy, specifically, capital markets.

Peter Higgins 04:11

Brilliant, I love that reply. Thank you. Now I want to go back a little bit if I may just ask you about your greatest lessons, memories of that period during when you’re working in a civil service because you’re you know, involved in that sector for around 12 years, there’s lots of goings on. Lots still going on within the sector, what was the greatest memories and lessons from that period Simon?

Simon French 04:33

The power of pulling datasets together and that might sound kind of some technical answer, kind of hope, not a boring answer.

But it’s, let me translate it into economic outcomes. So nothing that is worth doing in public service is easy, and is linear.

It’s complicated. It means run, you know, bringing datasets together be bringing delivery organisations together. And when it came to designing where the government at the time in the mid-2000s, was going to roll out, childcare short start centres, the type of things that help particularly single mothers, but parents across the economy get back into work by providing affordable childcare in their local area, actually understanding where to put those short start areas required data from the Department of Education, and the Department for Work and Pensions coming together, the data mining to get understand where you get your best bang for your Buck in terms of the use of public money.

And, look, there are conversations ongoing at the moment on the efficient use of public money given the deficits that have been spent the world over. And therefore, if you’d like my reflections were to squeeze out the top amount of value out of public spending, you need to delve into the data merge datasets together, we come up with rigorous empirically grounded views, because otherwise, you’re just another person with an opinion and you lead to big miiss allocation and taking those same that applied methodological lessons and then applying them to my current career was the when I talked to my first answer about the testbed the development that was able to take place. That example early on in my economics career was really quite important and influential to my approach to economic analysis.

Peter Higgins 06:26

Brilliant, thank you for that Simon, do you join Panmure Gordon, as Chief Economist in 2015? How did that opportunity come about? And what were your aspirations at the time when you took the role?

Simon French 06:38

Yeah, look, it would be very easy for me to sit here and say, look, you know, I reached out to people in the City and present it. It wasn’t like that. I have to be very honest. I like to be very honest with my answers.

I was working at the time for someone who’s been influential to my career, someone you’ve interviewed recently, Stephen Kelly, former chief executive of Sage (SGE), Micro Focus (MCRO), he did a tour of duty as he calls it, in the public sector and I ran his private office in my last post in the civil service.

And he had experience of working with Panmure Gordon when they were his broker, as Chief Executive of Micro Focus.

And those contacts enabled me to initially go to Panmure on a one year secondment because the public sector that the civil service want an exchange of experience, want their analysts to have a plurality of sector experiences. And the plan was to go out for a year experienced that and come back with a more enhanced set of skills.

Eight years on I am still here. So you can guess if you haven’t already the seminar scenario where I took a real interest in what I was doing at Panmure Gordon, they took a liking to me and presented an offer that means I haven’t returned to the civil service.

Peter Higgins 08:06

No, I love that reply and, and the beauty of it is I know that Stephen is always one that’s looking out for the sharpest brains and the sharpest minds and he wants to wants to work with the best of the best.

So he clearly saw something in you which you know, which was absolutely spot on at the time. So yeah, he’s got he’s got good vision has Stephen. Now I wanted to ask you if I may, can you share an overview for those that don’t know about Panmure Gordon, its services and its role within the investment industry, please?

Simon French 08:34

So we are a corporate broker to about 100 publicly listed companies and we provide a full investment banking service as nominated advisor, corporate broker, review providers of research trading for largely the UK mid-cap sector, small and mid-cap sector. And that role, I think all of us who have been engaged with capital markets in the UK recognise that the health of those markets is currently being questioned and the importance of fundraising, good quality research, good advisory service that I think has never been higher when at a time, there are global investors looking at whether they have to be exposed to the UK equity markets.

And so Panmure Gordon, the entire advisory, stockbroking, investment banking community in London across the UK, it’s not just a London phenomenon, other good finance, great financial cities across the country have to have to continue to raise their game if the UK capital markets were to remain relevant and keep their relevancy they’ve developed over the last few decades.

Peter Higgins 09:49

Indeed and I agree with you that I think the beauty of what’s been going on over the past, I think, for the last five years, is that focus is more national and not making everything all about London.

I think that’s fantastic. We’ve got so many different hubs going on, you know, technology hubs and biotech hubs and pharma hubs. So, yeah, that’s really good that’s going on and then for raising money, as well, regionally, as well as some really important.

Now, Simon, I’m conscious that you wear several hats, which encompass numerous facets of the utmost importance for and within Panmure Gordon, please, can you give us an overview of the sheer scale and importance of your roles and responsibilities within the group?

Simon French 10:26

Right, so I’m Chief Economist and Head of Research.

So there are two hats there that I principally wear. On the Chief Economist side, this is providing, I think, two out of the three buckets of advisory services advisory service for institutional clients, institutional investors, these are pension funds, hedge funds, who private wealth managers who are looking to understand how macroeconomic impacts are going to influence their investment decisions.

And economist and danger you’ll get me on my soapbox here is a danger that economists are confused as being somewhat fully their fortune tellers or they have a sort of mystic ability they don’t the job, I think firmly of the economist on the on the sell side is to through their analysis try and de risk an investment decision you cannot remove risk be can de-risk it if the quality of your analysis is good.

And that is my delight, my sweet spot in terms of my economic advice for the institutional audience. But then I also mentioned Panmure Gordon, we are corporate broker to more than 100 companies. And the vast vast majority of those companies do not have in-house economic expertise. And therefore there is a shared service bear that I provide to two boards, boards of our companies that we representing our broker to but also a broader suite of, of companies where they want to understand the economic impact on their business.

Because again, you know, we have a lot of great UK public companies and private companies who are very good at understanding their market, very good at understanding their product, but actually, no more so than in the last 12 months are potentially sideswiped by big macroeconomic events.

The second big bucket of my economics role is supporting our corporate clients. And then my other hat is as head of research and we have more than 25 equity analysts, Panmure Gordon, covering a multitude of sectors across the UK public markets, each analysts covering between 10 to 15 public companies in terms of their research, and I have managed that team to ensure that or try to the best of my ability, it’s impossible to ensure to make the best of my ability to support them.

And I think that’s really important as a as a manager as a leader. And I never want to be dictatorial, I want to support them to be the best hands they can be and I’m very blessed to have a very experienced very expert research team and my job as head of research is to facilitate support and on occasion provide also a top level economics steer to like cross populate my economics role with my head of research role to make sure the Panmure research is the very best in the marketplace, which is our ambition.

Peter Higgins 13:13

Brilliant. I note that you have helped raise clients over 2.5 billion since 2020. So you know, and 270 stocks, 50 analysts or more, you’ve got there as well. And you’ve got over 100 corporate clients. So you’ve got your busy team, you know, and you’ve got aspirations in the US as well, I believe?

Simon French 13:32

That’s right. So you mentioned earlier in the podcast, the importance of regional footprint so have recently opened the Leeds office to support the levelling up agenda, which is always focused are in the UK about capital.

Spending for the public sector the region’s but actually capital raising for the great UK companies that exist across the north of England particularly, I think, is an area that the London based brokerage community has somewhat turned its back on in recent years.

And we want to leave in the opposite direction by opening Leeds office that really shows our commitment to the regions but you’re right, the other big geography is not just international in the US market and the relevance of US investor cannot be understated.

If you want to have a viable UK brokership model, you have to have US distribution, because they own 40% of UK equities.

They are the price maker on global capital markets. And being able to distribute to be able to take our corporates to market in the United States is key. So we have a team both on the sales and on the trading side. It’s sell straight into the United States. And whether you think and maybe it’s a debate for another podcast, the sheer scale of the US market compared to all other capital markets is healthy.

It is the reality of quite a number of years now where the US market has grown in terms of liquidity and scale and left Europe and Asia behind. Ultimately.

Peter Higgins 15:03

Thank you. Now you’re working with UK and international clients, Simon and businesses and CEOs and CFOs. I’m often struck by how a company decides who they want to work with. What sort of best of breed sort of traits are you looking for regarding successful businesses and CEOs and CFOs? When you look and say, yeah, we’ll work with that particular business.

Simon French 15:27

But you are I mean, this is not unique, certainly to either myself or to Panmure Gordon, but you are looking for companies that have an intellectual property that is difficult to replicate the famous Warren Buffett moat around your investment idea.

It can be either intellectual property or within that some technology, the spun out about intellectual property that is also quite difficult to either scale or duplicate or done as efficiently. And when you’re thinking about the type of and I come back to this phrase, you know, when international investors global asset allocators are looking at allocating to the UK and ask themselves the question, do we have to be invested here?

If the UK on his public markets has companies that are best in class, best in breed have intellectual property that isn’t available on other global equity markets.

Then the answer will be yes, if we don’t, and this is why the health of capital markets are so important, then actually UK as less than 3% of global GDP, can increasingly be ignored.

This is why the brokerage community supporting the transition of our great IP great private companies into public companies is a really important part of making a healthy ecosystem. And those are the type of businesses and leaders we look to work with because those are the ones that can get a broad base of investors diversify shareholder register, which becomes in itself, stable capital, and ultimately for business, cheap capital, which is what they want to enable them to grow and to scale and achieve for all their stakeholders the outcomes they want.

Peter Higgins 17:09

Brilliant, I love that reply. Now, you touched on the health of markets, corporate markets, we’ve seen, or we saw a flurry of listings in 2020 and 2021. And we seem to be flatlined, a little bit and decline of IPOs in 2022.

We’ve also seen some difficulties regarding some of the IPOs declining from the IPO price. We’re even seeing some day listings. The most recent example being Joules.

How should investors and CEOs overcome some of their behavioural mistakes regarding overconfidence?

You know, IPO comes out to be marketed well as sometimes they don’t flurry, They don’t have a successful time of it.

Simon French 17:49

Yeah, I caution. You know, I don’t ever want to answer questions such as this as if I know the answer, indeed, if anybody knows the answer in totality, in totality, because every single cycle of IPOs, Initial Public Offerings, tends to be very frenzied. And then it quickly the door quickly shuts to new issuance, and you’re you referenced that period, there was a frenzy of IPOs as the world economy got back moving after the pandemic, and then some of the froth lead to declines the closed capital raising initial primary capital raisings for pretty much the whole market and has been the case throughout 2022.

Now, it’s difficult sometimes to disentangle how much of that was just capital raising, overdoing it and getting carried away in 2021, versus the fact that capital has become more expensive this year.

And the whole investment ecosystem is adjusting to a very, very different cost of capital, not just from 2021 principles to but arguably always since 2008.

And you could even trace back the bond market movements to a different era, maybe 30-35 years ago, these are pretty seismic changes.

So that’s why I say I don’t profess to know the whole loans because there are multiple factors play at play. Here there is the undoubted exuberance, the overheating of the IPO market, which is a cyclically was not sustainable, versus very, very different financial conditions, that just makes primary issuance more challenging.

The one thing I would say going into 2023 is we are now seeing companies who are looking to transition from being private companies, to public companies, come back to the marketing, not yet having raised capital, but doing pre-marketing at a more realistic valuation based on the fundamentals of the cost of equity capital today, not 12 months ago, and understanding some of the economic challenges that are undoubtedly still to come.

And pricing those accordingly. And when you get the realism starting to emerge between the buy side and the sell side and the corporate, so those are those three groups coming together, you start to see activity starting to return. So I’m more upbeat in that regard for next year.

Peter Higgins 20:06

Brilliant. Now, you touched on money was one stage cheaper, but it’s got more expensive recently, therefore, the venture capitalists and the other entities that support certain companies, the monies has gotten a bit more expensive. Given your vast data crunching Simon, an access to via Panmure Gordon, regarding the economic outlook, what’s your view?

You’ve touched on it a little bit there regarding 2023, you know, you touched on maybe we’ll see more IPOs, maybe we’ll see more fundraising. Could you expand on that just a little bit, because I’m what I’m conscious of is that we’ve got an audience of listeners here who are looking to, to allocate money to the markets, but towards the latter part of this year, it’s been a bit of a, you know what, I’ll just wait until 2023.

Simon French 20:49

Yeah. So from an economic standpoint, and I put my economist hat here not my job, I have one here rather than as a stockbroker. And I would say that there is still in 2023, some more interest rate increases to come taking the Fed funds rate, the Bank of England base rate, ECB deposit rates higher in nominal terms.

But on the flip side, inflation will, will come down. I mean, I know many of your listeners will have heard that promise from economists quite a lot over the last 12 months. And it hasn’t always been the case. But I think we have gotten through peak inflation now and that will become a slightly easier backdrop for consumers.

But for prospective investors looking when I mean timing, the market is a notoriously difficult thing to do.

I will throw in a couple of data points, one on the bullish side, which is an important place to start. I think. The UK equity market currently is hovering around 10 times forward earnings. So forward P/E, price earnings, if you had bought the market on less than 10 times earnings in the history of the UK equity market, on average over the next five years, you made a total return of about 93% which is considerably better than if you bought the market at any higher valuations at the bottom end of the range.

So for example, if you’d lost so if you’d bought the market when it was more than 20 times earnings, on a five year view, you would lose money, at least historically, that’s been the case.

So there is a valuation story that is very much if you like supporting timing the market around these levels. The slight caution of course, I’m an economist, so I’m going to give you on the one hand.

On the other hand, you never getting a 100 economist, even even you’re pulling power, Peter will struggle to get a 100 economist on your podcast.

On the flip side is the fact central banks is not going to be withdrawing liquidity from the marketplace next year I talked about interest rate is not just interest rates, it’s also quantitative tapering, having spent a decade or more getting used to the term quantitative easing, which was central banks buying assets, mainly sovereign debt, they are now selling those assets back to the market.

And that means that the private sector is being asked private investors are being asked to soak up lots of public sector debt that the central banks have been buying, that is tightening financial conditions that pulling liquidity available out of the available market for equities.

So that is the cautionary tale, which is this QT, quantitative tapering is very much going to be a theme of 2023, it’s going be quite difficult to see the kind of returns that we’ve become used to in the QE period, being sustained in the QT period.

Peter Higgins 23:22

Love that response, I’m going to have to listen to that thoroughly when I go back to actually let that soak in, it also can be important there.

Lots of important aspects talked about there, I want you to go down a bit more, if you may, in more detail about the importance of investors, institutional or otherwise, and private investors realising that potentially we’re going to be going through a period going forward of slower growth, still growth, but slower growth.

I think we’ve had periods in the past where there’s been exponential growth for certain companies, but investors need to well, yes, lower their expectations possibly going forward.

Simon French 23:55

Yes, from a macro economic standpoint, the global population is growing at a slower rate, the working age population, so the most productive part of that population is shrinking in large parts of the world, including China, Japan, the Eurozone, not yet in the US, UK, Canada, but it will come as the population ages.

And therefore it becomes just harder to squeeze out the level of growth that we had, during the post Second World War baby boom period where we had a real demographic bulge, which could support economic activity.

That is not to say that growth is impossible. Far from it. Actually, I think, and this is certainly where I’m the cup half full view, is the productivity, which is the absent adding workers to your economy is the other route to generating economic growth, I think productivity is about to kick up higher, if you like out of necessity, because workers are going to become more scarce.

And actually, automation, capital deepening will support productivity and some of the changes as a result of the pandemic facilitator a more productive economy, despite sort of the political commentary to the opposite.

And so, yes, investors need to condition themselves for, if you like, less what I would describe as easy growth, either debt fueled or demographically fueled.

But perhaps and I think I mean, I’ve written in in my times column, and also my research at Panmure, about this is that potentially productivity comes as the unexpected saviour for investors.

Certainly businesses that can tap into those trends are becoming slightly less labour intensive, more capital intensive, may be able to squeeze out productivity rate or to growth that they really haven’t been accustomed to for the last 15 years or so.

Peter Higgins 25:53

Excellent reply. Thank you. Thank you for that, Simon.

Now, Simon was we’ve touched on it there, we’ve spoken about it. Already. The markets experienced great turbulence and increased volatility due to rising interest rates, rising inflation in energy costs. And of course, we’ve not touched on it geopolitical conflicts, which is what’s ongoing at the moment.

During such times difficult times the best course of action, to take a deep breath, and focus on one two long term investment goals.

However, this is harder and not as easy. It’s easier said than done and experienced economists such as yourself and investment strategist, what advice would you give to long-term investors at this time?

Simon French 26:30

Don’t try and time the market. I mean, I’m mindful that we just spent five minutes maybe 10 minutes talking about some of the factors that may encourage you to time the market to position yourself accordingly. But look, there is a like inconvenient truth for the sell side, sell side advisors, which is that none of us possess the gift of perfect foresight. You know, pandemics come along, you know, wars come along, hopefully not in 2023, plague of locusts but you know, it wouldn’t it would be on brand with these big shocks that have taken place in recent years that are far too regular, for everybody’s liking.

My advice, though, to long-term investors is the age old strategy of diversifying, not so much over sectors, but actually over time, diversify over time and recognise that if you keep putting capital to work at a regular intervals, you know, you give yourself the best possible chance of having some exposure to those moments in capital markets where those supernormal returns are made, which seem obvious in hindsight, gosh, we should all should have bought in early 2009 or a March 2020.

I mean, at the time, I remember, you know, the, certainly in 2020. By 2020, it was very difficult to imagine when we’re all locked up in our, you know, in our rooms in our homes, that actually now was an opportunity, potentially a once in a generation opportunity to make supernormal returns. And even if you think it was obvious at the time, it probably wasn’t. So don’t again, from a long-term capital allocation standpoint. Try and be too cute in that regard.

LSE 28:16

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Peter Higgins 28:34

Brilliant, now Simon, I want to talk, let’s take a little bit of a break here now and ask you some personal questions about your own investing strategy. Do you hold an ISA? A SIPP? How do you invest? And what is your personal investing strategy?

Simon French 28:48

To try and understand that my major source of income of wealth is my economics output my intellectual property, my employability.

So I try without going into too much specifics if you’d like to hedge against that. So things that are unlike, you know, let’s say I’m exposed as I am as a as a homeowner and as economist in the City to the financial cycle, I’m looking for assets that are as close as possible. And it’s very difficult to find negative beta assets, but some low beta assets to the financial cycle, because from a, you know, Simon French balance sheet standpoint, that is the best hedge against my major earning power, and my other major assets.

So yeah, I am a bit of a gold bug in that regard. I like the zero or in some cases negative alpha as the negative betas that you see on some of the UK listed and indeed globally listed gold producers.

It’s not for everyone I absolutely get the gold is not for everybody. But as the type of asset that is still hedged against the aforementioned sort of assets, so that I have both tangible and intangible assets. It feels like the best compliment.

Peter Higgins 30:05

Brilliant, thank you for that. Now, I’m conscious that you’ve got a young bear, you know, a little one, 18 months of age, have you started these savings plans for your young daughter?

Simon French 30:15

Yes, yes, I have. At this stage, just cash. One of the things we haven’t covered is that the returns to cash having been paltry for 13-14 years.

You know, there are two to three year accounts now yielding four and a half percent. Now you could argue after inflation that doesn’t look particularly healthy. But if you if you trust my economic forecasts, all my inflation forecasts, then over that two, three year window, you’re probably going to be generating a positive real return as inflation comes down and potentially under shoots if energy markets revert and therefore your real terms return on cash over the next three years, is looking as good as it has, I would say for about 15 years.

There’s the attraction. It provides the opportunity if I want to change allocation in two, three years’ time as my daughter gets, gets a bit older to utilise that obviously a very sort of liquid asset class but that there is the challenge actually for publicly listed companies. And you know, all investors is that suddenly cash represents a viable alternative.

Having not been pretty a very attractive for quite a lot of people’s entire investment life. It certainly if you’re a younger investor.

Peter Higgins 31:35

Brilliant, now you touched on gold and it not having any non-yielding, but safe towards almost negative correlating sort of asset. Now, lots of people have been talking about the merits of gold for decades and time immemorial. And so I’m conscious of what I’m asking you to expand on why that assets is, is the main asset you’ve chosen to invest in away from your main assets?

Simon French 32:00

Yeah, no, absolutely, absolutely.

So it is, it is not based on an expectation that gold will outperform all the other investment asset classes it is the relationship with my other major source of income and wealth, which is the I think it has to be a cornerstone, sort of lodestar if you like, of investors to understand where your principal value as a as an individual as a worker, if you’re a working age, where that value is derived from, and should events turn really bearish for economists and or the housing market and or financial services, which kind of my overexposure, what is the type of thing that could lean in against that, and that’s why I like gold.

I also work with our mining analyst here at Panmure, or on our own gold product, the golden nugget research that goes out once a quarter, which looks at the UK listed gold mining space. And I like the fact that look, and there is there’s obviously the bottom up approach to understanding investments looking at companies like Centamin (CEY), Fresnillo (FRES), Hochschild (HOC), you know there are UK Ariana Resources (AAU), there’s Pan African (PAF) there’s quite a few gold mining companies listed in London, for whom understanding their production profile, their mind plans, their management teams is really important for investors, but bring that expertise from our mining analyst together with an economist who will understand that at least I hope I understand central bank demand for buying gold.

One of the big buyers in the gold market is central banks, potentially quite a big buy going forward if the weaponization of dollars and weaponization of euros as a result of results of the Russia result of the Russia invasion of Ukraine starts to make central banks look at other proxies for holding assets rather than direct dollar exposure, gold could benefit from that. But also the interaction with the US dollar, their interaction with inflation.

These are big macro themes, which an economist has something to say on put that analysis together with a mining analyst. We think we got a pretty good product, which the mining sector, the gold mining sector seem to quite like I think that’s the power of an economist and the sell side research are working in tandem.

Peter Higgins 34:26

Brilliant. Yeah, sounds like a fantastic combination. Now, you touched on the mining side. So I’m going to have to ask this question, Simon.

A lot of conversations being had a and is prominent in all corporate language now for many companies currently, with regards to net zero targets.

Should sustainability be part of the company’s fundamentals going forward, not just mining companies, but any companies at all?

Simon French 34:48

Yes.

But and I’ve written about this quite a bit, is ESG has to evolve on two fronts.

So it has to evolve into becoming business as usual for all companies, not just public companies, private companies, and therefore ESG is great success, sustainability, the agendas, big success will be when it is effectively eliminated from being a standalone topic, and it’s just integrated in how it is approached. The other thing is not to make and this is crucial, I think, not to make sustainability ESG.

Too much of a quantitative exercise, because the heterogeneity, the diversity of companies across sectors, or even within sectors means that if you pick a metric, and you ask all companies to report against that metric, you almost invariably just it’s not going to be fit for purpose for large swathes of the market.

You end up gaming it and miss reporting.

I think the nuance of ESG will be ESG 2.0, which I hope emerges out of this period of capital market volatility, we get ESG not being sort of as quantitatively driven, which is a big challenge to capital markets, the one to be more passive, more quantitative, and being asked asking it to be a bit more elicited is a big ask when the big value here is on is on automating and quantifying a lot of the reporting metrics to try and reduce the end cost for investors. But I think it’s a necessary thing in the sustainability agenda.

Peter Higgins 36:22

Love that reply. Thank you. Now, Peter Bernstein, the American financial historian, economist and educator is quoted as saying “the fundamental law of investing some uncertainty of the future, which is an economist”I’m sure you’d agree with. With that in mind, what are your goals and ambitions? For Panmure Gordon going into 2023 and beyond?

Simon French 36:43

Okay, I can’t speak for the company at large look, we have a strategy, which I’ll briefly talk about, which is to continue to be the trusted partner for growth companies in the UK public, and indeed, the private markets. And that trust element, I think, is really, really important for investors. There, you know, particularly in a year when some asset classes and we haven’t yet talked, I wonder whether it’s up your sleeve to talk about crypto assets. But you know, as a time when trust is an important enabler of good allocation of capital, crypto assets, I would say is a particularly bad allocation of capital, I’d say, Panmure buttressing its 140 year reputation of being a trusted adviser is absolutely front and centre of what we’re trying to do, and raise money for those companies who we think of the future have better rates of economic productivity in the UK, more healthy capital markets.

But I can probably more eloquently speak about my own priorities on the research side and the economic side, directly in terms of my economic analysis, you know, that economists have been bruised myself included by this surge of inflation, the type we haven’t seen for 30 to 40 years, understanding the persistence of that, documenting that and providing, you know, reappraisal models on how we model inflation, I think it’s a really important priority for economists to retain relevance and credibility.

So I will be trying to do that as some figurehead or a central part of my economic research and then sort of running a research department.

I go back to the fact that we’ve got some unbelievably talented equity analysts that work in that team and ensuring that they are giving investors both retail and institutional investors. The best summary of the investment case is paramount is absolutely paramount.

Because if we don’t, capital will get misallocated, efficiency will be lower productivity will be lower, and we all will be poorer.

This is the great if you like social function, which is not a thing often talked about in capital markets. But there is a social function here, which is that if capital can be allocated more efficiently, and professional services, stockbrokers, researchers have an important role in that, then we can all benefit the pensioners, retail investors, favours, government, taxpayers, there is a big upside here and you know, in our relatively small part in that ecosystem, certainly it is a UK or global economy level is a small part of the ecosystem performing a really important role in in breaking down, if you like informational asymmetries that requires.

Peter Higgins 39:34

I love that reply. I think, the importance of what you’ve said there is about social function that you and your team actually engender going forward for everybody.

And we often talk about the fact that building wealth is a marathon, not a sprint. And I would ask you, therefore, to just give one piece of advice, I think you’ve touched on it mainly already, to someone on the cusp of pursuing financial independence through investing in the markets.

Simon French 40:00

Yeah, in terms of one piece of advice is and they say investing with a sense of humility and recognising what you don’t know.

I went to give a economics talk at my old school, which hadn’t been back to for almost 20 years. I gave it just over 12 months ago. And I spoke, I hope, eloquently for about 45 minutes to the sixth form about economics late in inflation labour markets.

This a workhorse economic modelling approach. And 15 minutes of questioning, they were all about non fungible tokens and crypto assets. Maybe a sense of the type of people I was talking to were the type of age and the people I was talking to. And what struck me was, you feel like there was a, a blind faith there of a sort of a belief that stuff, you know, stuff, these assets could only go up. You know, it was new economy, the old stockbroker financial services model did not understand what was going on. And I learned back into that thing, look, private currencies have been around for millennia. And they’ve always failed through the lack of institutional backing. Important, although uncomfortable, that may be for some investors who want a more or less a currency that is embedded with the role of the state, but it’s an important function. And I think it will, why how I bring that back to the important bit of advice to investors is, we get ourselves into the worst bit of exuberance, when we think we’ve reinvented the wheel, something is new, there’s very little new, there’s variations on some old stuff that may look new.

But I think always be humble, show a bit of humility, that something that is truly new and novel is a very, very rare thing, and is more likely that it is an iteration of something in the past. And therefore those lessons, deep research, looking at data, historical trends have a real value in informing your opinion.

Peter Higgins 42:08

Brilliant, I love that response that we have so many of us certain, maybe this is just Gen Z, or maybe some above and awesome.

Some people that are older than me that have gone into crypto and I’ve gone why, you know, but everyone has to learn some somehow somewhere. Now you’ve touched on schools and going back into school Simon, I want you to touch on the philanthropic side and the paying it forward side of yourself. And I’m not sure where you find the time to be honest. But you’re a formerly the governor of the Brentford School for Girls.

So share it with us a little bit about that what you did your role going there, hopefully trying to entice more young, more young women to join the investment industry, but maybe I don’t know.

Simon French 42:46

So not so much with a view to encouraging the young ladies that went to school for girls for following their career path there was it was actually much more than I have had at the time spent about 15 years in both public sector and the private sector in quite a mathematical data intensive environment. And actually, a lot of what we’re asking our schools to do right now, across the full spectrum of schools from free schools, or academies, whose to the private sector is to run themselves like businesses, or at least come into if like the exposure of energy markets, when they’re buying their energy contracts, insurance, etc.

Running quite significant budgets in a timely area of prices, wages, quite volatile. My role, actually, I thought could be to support a school that had a governing council at the time when I joined it, there was very much embedded in the educational side of things, but perhaps didn’t have the full skill set on the financial side.

So I supported to the best of my ability, and the team to make that transition which all schools are going through at the moment to be run a little bit more like businesses and make sure that don’t go back to this theme that I’ve come to again and again in this podcast, trying to minimise the errors, not make perfect decisions, but minimise the errors. And if my tenure on the governing board allowed us to be more efficient in how we allocated the money that is given to the state system by government, then that allows us other money to support education. So to the efficiency argument that a good governing board that has good financial acumen can support the teachers who did I mean the head teacher was an inspiration is an inspirational figure to Brentford School for girls and I have a total admiration for what she has been able to do with her senior leadership team. And so all I wanted to do was be able to support her and her SLT on that journey.

Peter Higgins 44:51

Brilliant. I’m really, really pleased that you have done that. And I think unfortunately, you’ve touched on – my daughter’s 15. And at the moment, it’s just academic, academic, academic, got more homework, more homework, more exams, more tests, and I think it’s important to actually think about how we teach and enable our young people to become young adults, and not make it purely driven about academic results.

I think it’s very important to look at that.

Now, Simon, you’ve as someone who’s studied and analysed and dedicate most of your life thus far to the pursuit of clarity and understanding regarding economics and economics data, during your various roles. What is one truth about economics that you’ve only recently discovered or fully appreciated up until recently?

Simon French 45:36

Oh, gosh, there is a good question. I think that, you know, no regime, economic regime is forever. And we can think of the lower for longer or lower forever thesis that dominated investment thinking the idea of the cost of capital was stuck at the lower bound.

I probably, I don’t think I ever subscribed to the lower forever thesis.

But I, I didn’t see this pickup that initially started in the energy market, initially starting consumer durables, but started to generate inflation elsewhere in the economy, I didn’t see that it would, if you’d like, generate the level of second order effects, because I thought a lot of a lot of what we’d seen was what was a thing of the past from the 1970s, 80s, we’d lost it. But it has come back in in quite a varied range of guises.

And so that’s reinvented my understanding of the how the transmission mechanism works between a exogenous shock and price is, and potentially second order inflation, which I thought had gone away and certainly had gone away for about 30-40 years.

Peter Higgins 46:43

Okay, I’m going to ask you politely. Could you just for the layman’s terms, can you expand on the second order effects of the inflationary transition that we’ve had?

Simon French 46:51

Yeah, course, yeah, second order effects. So energy markets generated the initial surge from inflation but inflation we now started to see in wages in rental market, or the type of things that are second order, stop and inflation second order effects.

Peter Higgins 47:05

Brilliant. Thank you very much. Now, Simon, I’ve got two final questions for you.

Conscious of time, so I’m going just go back to the Michael Korda quote that I asked you about earlier, and then ask you really, to focus on your final achievements I’m conscious that you’re only a young man in your 40s. So it’s not final with respect to putting clothes on to 2022. So from a young man interested in maths to a close of 22. What is your proudest personal achievement? Success today, please, Simon?

Simon French 47:36

Unquestionably, the fact I have kept my daughter alive for 18 months. And I say that because parenting gives you a whole new perspective of what is important.

We spent a lot of time talking about financial markets, investing, but actually, the pride that I get from going home at the end of a long day and seeing that my daughter is healthy and happy. And yeah, I got to give enormous credit, far more credit to my wife than to me, but I played a role in that. It gives me great pride.

Peter Higgins 48:10

No, brilliant thing, what I love about that response, and I feel it too. And when you said it, I was like, Oh, that’s perfect answer is that when my daughter arrived, I was like, I said, I’m retired. I said, I’m not going to work for anyone again, I’m retired, I’ve got enough money and are not going to work again. And I’ve been doing that since the age of 39. So spending that quality of time with her has been absolutely enormous. And it’s changed my, every single facet of me since then. So yeah, and having a daughter first will make you think differently about almost everything.

Right. Thank you for that response. Simon. Thank you. So my final question, Simon, thank you ever so much for being on this this podcast with me.

We’re currently seeing elevated economic uncertainty Simon, we touched on most of it already, rising inflation, geopolitical, distress, war, UK Government turmoil, which we’ve had ongoing. Hopefully that settling now as we go into 2023. And investors expectations are low.

There’s a level of fear and dread regarding the market. However, I wanted to finish on a positive note Simon, would you like to close this interview with regards to the potential long term benefits of prudent long-term investing Simon, please?

Simon French 49:17

Yeah, so all of us who have any excess capital that we don’t want to immediately consume that have a choice of how to allocate it.

If we can find parts of the economy that we can’t directly work on or with, but we can get exposure to through providing capital, either through debt, capital markets, or public equity, the various sources, then we can share in those gains.

And those companies can get an allocation to be able to do more of the good stuff and more productive stuff. It’s the social welfare of capital markets, it’s to move savers’ wealth to areas where it can be most productively delivered for all parties.

And when it becomes a zero sum game where everyone’s battling for their share of the pie, it can be quite disruptive, but when you can find the economic opportunities where everyone can benefit, that’s the real beauty the real social welfare function investing and that’s why you’d want to do it because it’s a it’s a never ending challenge. But the rewards not just for you, but socially, a pretty great when you get it right.

Peter Higgins 50:29

Brilliant. Love that reply. Simon has been absolutely fantastic. Insightful. I knew it would be I knew I’d enjoy this interview.

Thank you ever so much for coming on here on the Investing Matters podcast with me. That was Simon French. The Chief Economist, Head of Research at Panmure Gordon, you can also find Simon on a regular basis on CNBC, Bloomberg, BBC, Sky, and also as a Times columnist. Simon, thank you so much Sir.

Simon French 50:57

My pleasure. Take care. Thank you, Peter.

Podcast link found here: https://www.lse.co.uk/media/the-london-south-east-investing-matters-podcast-episode-32-simon-french-managing-director-chief-economist-and-head-of-research-at-panmure-gordon.html

Author: Peter Higgins, The London South East, Investing Matters Podcast

Simon French

Managing Director, Head of Research