This is a City AM Studios production. Hello and welcome back to Business as Usu. Our investment reporter, Maisie Grice, recently spoke to the UK boss of the world's largest brokerage firm. Richard Flynn is the UK managing director of Charles Schwab, who have just over $12 trillion under management. He came into the studio to chat about the markets in the first six months of 2026. That's SpaceX mega IPO and where those hidden investment opportunities might lie for the second half of the year. It's a really interesting conversation, and we hope you enjoy. Maisie, take it away.
SPEAKER_02It has been a roller coaster first six months of the year, with investors having to navigate the Iran war, mass tech sell-offs, and a blockbuster IPO. But how do they handle that? And how will they handle the second half of the year with the knowledge that we have two more mega cap IPOs potentially listing? Here to discuss this all with me is Richard Flynn, Manager Director of Charles Schwab. Richard, thank you for joining me.
SPEAKER_01Thanks for having me, Mason.
SPEAKER_02Thank you so much. I think just to start, let's go back to the beginning. Let's go back to when the Iran war started, because in the first quarter of the year, we started quite well. Things were quite level, retail investment was picking up in the UK, things were churnal on quite nicely. Then the war started, and people got a little bit jumpy. And I'm curious, how do you think the markets reacted to that? How did investors handle that?
SPEAKER_01Yeah, I think there has always been a sense of geopolitical risk around the markets, and it's been pretty pervasive in the last few years. You know, if you took a step back to a lot of the predictions for 2026, a lot of people felt that some kind of escalation could happen. And what would that mean specifically for energy markets, for defence, etc.? Um it probably was a bit more abrupt than people would have imagined. But nonetheless, uh, you know, the the relatively muted response in the following weeks after uh the first uh attacks were probably predictable, actually. You'd you'd hope that the market had priced in some element of risk around ultimately took place in Iran.
SPEAKER_02And how did investors handle that in your regard? Was because there were some mornings where we would log on and we check the stock market and things would just tumble or the oil price would jump again and people would be quite, you know, quite scared of how that was looking for their portfolios.
SPEAKER_01Well we we we got quite lucky with our timing because we we surveyed a thousand UK investors over the course of that week. We do it every year. Um, but it was pretty interesting to get direct feedback from UK investors, and what we found was that they were actually remaining engaged with the markets. Um there was no mass retreat, there was no sense of panic, which is probably to the credit of UK investors who who can see the bigger picture, see the longer term trends, and who price in geopolitical events to their to their risk management and their portfolio management.
SPEAKER_02And there's it on risk management, does that come back to the need to be an active investor? Because I've been having discussions recently where a lot of people in the industry have started to raise the alarm around passive investing and allowing your portfolio just to follow market moves and how that can create its own sense of danger, even if you're not looking at it every day.
SPEAKER_01Yeah, it's it's an interesting phrase being an active investor because a lot of people might assume that that means day trading, you know, moving in and out of the market very, very uh rapidly. Um, I think what we would promote is being actively engaged. And that um is just the same for people with longer-term investment strategies as it would be for people uh trading regularly. So, you know, you know, there has been a difference in the last few years, particularly with the immediate availability of information, both market information, also portfolio information, that the days of people looking at their portfolio once a quarter when it lands through the onto the doormat through the letterbox, they've gone. So people of all generations now are more engaged with monitoring their portfolios, monitoring their performance and and risk management as well, uh, which is which is good. We do see higher levels of engagement across younger investors, you know. So when we look at the the demographics, we see you know Gen Z and millennials typically are you know checking their portfolios or making adjustments to their portfolios, at least on a monthly basis. Roughly, I think 58% of investors in that cohort do significantly lower for the for older investors, the the boomers and um and gen X.
SPEAKER_02Yeah. I mean it does kind of feel that Gen Z millennials are going to be more clued on because the story of the year away from Iran is AI and tech, and we have seen that in the past few months on a very quick and fast scale growing off the back of the SpaceX IPO. But then also we've had quite a few tech sell-offs, which over in Asia has really impacted the Cosby. So I'm curious about your take on the tech sell-off. And you know, and if we do have some more earning results that come through that make investors feel like a little bit iffy, how should they react to that and how should they balance their portfolio?
SPEAKER_01So a lot of younger investors wouldn't remember the dot com crash in in 2000, right? I don't think so. So um, but there are big differences in in how the market looks now with AI and a lot of the the kind of the sectoral diff uh leaders really. If you look at who is leading market performance at the moment, it is driven by AI and tech and and digital platforms. Now that leaves little room for error, but the fundamental difference between where the market is today and where it was at the time of the dot-com crash is that this is driven by earnings. You know, these companies are reporting significant earnings growth. In fact, 2026, so far, we've seen a 26% increase year on year in terms of earnings. If you look back at those valuations in around the turn of the century, they were all kind of fictitious. You know, they were they were based on potential future earnings and not actual earnings. So there's a big difference there. That said, it is a pretty narrow leadership group, and so that carries risk. And there is a tendency for investors to sometimes get carried away and over, you know, uh they'll they'll have significant um exposure to one or two big companies just based on performance or based on successful performance that they've actually invested in and seen ultimately grow and become a bigger part of their portfolio. You know, our recommendation to every investor is just maintain uh appropriate allocation and um diversification.
SPEAKER_02I think that's a really crucial point to make going forward. As we just said, we have the spaces IPO and it is being reported that both OpenAI and Anthropic are also gonna enter the market, which is very, very dominated by AI and tech. So again, that creates the risk, doesn't it?
SPEAKER_01And the risk is that at some point earnings may disappoint, you know, and and the market might react in an outsized way to those earnings. So there's always going to be a lot of focus, a lot of attention put on those earnings and earnings announcements from the companies that are leading the field.
SPEAKER_02And then on that conversation, you know, what other sectors are also having quite a good year that maybe have getting lost within this AI story that we're having at the moment?
SPEAKER_01Yeah, so I mean, nearly every sector is going to be disrupted by AI one way or another, and some are better positioned than others. So when we look at sector analysis and and we give our clients a schwab sector analysis on a regular basis to say who we think will outperform and who we feel may perform less well. At the moment, we we look at communications, uh, we look at healthcare. You know, if you look at, for example, diagnostics, if you look at operational efficiencies that AI will bring, they're very, very important. IT obviously is well positioned to benefit ultimately from the huge capital expenditure into AI. And uh materials, you know, if you look at the the amount of industrial growth, you look at the building of data centers, that they will require significant material investments. So we look at those four sectors as something that will uh will likely or has potential to outperform at the moment.
SPEAKER_02And then what about defence as well? Because that's been the word in everyone's lips in the past few weeks, hasn't it? We've had all the news about the defence investment plan and people seem to be going back into defence stocks quite recently.
SPEAKER_01Yeah, I mean, you know, it's it's it's been a pretty common play in the last couple of years based on Ukraine, based on the Middle East. I think when you look at those companies, obviously there are AI benefits to those companies as well. Fundamentally, they rely on significant government expenditure, and there is the geopolitical risk that that can weigh in at certain points in the future. So defence is is currently we're kind of mid on defence. We we we don't see it as something that's likely to outperform, but we would certainly recommend it as part of a diversified portfolio.
SPEAKER_02And then just coming back to retail investment and the culture that's going on right now, as we were saying earlier in the conversation, the government and the industry have put so much focus on getting people into the stock market, we need to boost the US economy and you know revitalize. And at the moment, the UK, we are currently at a bit of a crossroads. We don't know who the next Prime Minister will be. It's highly anticipated that it will be Andy Burnham, but at the moment nothing's been confirmed. But just in the knowledge that we are going to get a new cabinet and a new government, what does the industry need to see policy-wise to keep this momentum going and make sure that retail investors don't go back to cash?
SPEAKER_01Well, you know, the government has has made great strides in committing to retail investment as a key cornerstone of not just financial services, but in terms of our future social spending. You know, really the government has a vested interest in ensuring that people have financial independence from government. And so, you know, the the the announcement earlier this year with um Savvy the Squirrel and you know the marketing around personal investing, we we think that will have a very, very positive impact. And in fairness, over the last five years, retail participation in the UK has grown quite a lot. We are still lagging, I think we're the lowest of the G7 in terms of retail investment numbers. But um that said, we we just need people to participate and then to turn that participation into engagement so people actually take control and be comfortable with managing money themselves.
SPEAKER_02And then just to conclude, I know we've discussed mega cap IPOs coming up, but we also just touched on the first six months of the year. What's the story for the second half going to look like? Is it going to be just these mega cap IPOs that's going to dominate people's retail investment intentions, or is there other little aspects there going forward as well?
SPEAKER_01Well, there's there's always going to be a lot of noise in the industry. That's one of the things, Macy, that we always guide our clients to be be wary of. You know, there's a lot of noise out there. There has never been more commentary and analysis on companies, individual companies, on governments, on what's happening in the market on a day-to-day basis. With 24-hour trading and a truly globally interconnected stock market now, um, it's very easy to get drowned in all the noise. Um, big IPOs often, you know, have an outsized percentage of that noise, make an outsized percentage of that noise. So we, you know, we we would urge clients to always consider, okay, is it the right thing for you and why? Uh, you know, why does this fit into your portfolio? You know, what is it about this company that's attractive to you? And a lot of people around recent IPOs, when you ask them a couple of questions about that, find themselves pretty short on answers. It's just that they're interested in the the big shiny thing that everyone else is talking about. Um, so you know, for for us, diversification is key. I think, you know, at the moment, we always we're talking to clients about how to just just manage risk. You know, the market has been on an exceptional bull run. Bull runs don't last forever. Um, this one we do believe is is strong, it is backed by earnings, but people should be aware that you know, when there's a lot of noise in the market, that's when people can tend to make emotional decisions rather than logical decisions. And so, you know, with the market where it is, with people's portfolios likely where they are, if they have been invested over the last 10 years, they will have likely done pretty well out of the stock market. And that's the time when there's when you know when the sun is shining, it's time you want to fix the roof. Yeah, um, that's the time to again be engaged and manage your portfolio carefully.
SPEAKER_02Definitely. I like the point you made that little beyond the shine, because there's always something just beyond those big names that can also bring you some good returns.
SPEAKER_01Exactly. And in fact, you know, talking about recent IPOs, you know, a lot of our clients were very interested in, we have a fantastic product called Schwab Investing Themes, which allows you to identify, you know, 25 companies that are operating in space exploration, not just the big shiny ones, and many of other themes as well, like you know, cybersecurity, uh, pets, aging populations, cancer treatments. So investors can actually look beyond sector analysis to think, okay, what what's interesting? What over the next decade is likely to take a more prominent role in society and the economies that we live in and that could offer a good investment opportunity. So, you know, it's we find that these IPOs create a good entry point to actually looking a bit further at what else might be out there for you.
SPEAKER_02Definitely. Well, there's a lot to unpack there, and we definitely covered a lot of ground. So, Richard, thank you very much for joining me. I really appreciate it.
SPEAKER_00Pleasure. Well, we hope you enjoyed that as much as we did. If this is something you'd like us to do more of on a Monday, then please do let us know either via the fan mail link in the description or tweet us, send us a message on LinkedIn. Pretty much anything. We'll even check if the fax machine line into the building still works. Business as usual, we'll be back to business as usual in your podcast feeds tomorrow morning at 6 a.m. But for now, goodbye.