This is a City AM Studios production.
SPEAKER_00Hello and welcome to Business as Usual with me, Martin Kimber. And me, Simon Hunt. Coming up on the podcast, one of Britain's top pension bosses calls for a ban on holding American stocks in British ISOs. Could this boost Britain's capital markets or is it a block to building wealth?
SPEAKER_04Is the AI bull run running out of road? Chip stocks have taken a hammering the last few weeks. We'll ask an expert, is the party finally over?
SPEAKER_00Plus, could avocado mayonnaise be the unlikely saviour to rescue sales at this FTSE100 firm? But first, a new report has laid bare the scale of the fiscal challenge facing Britain's new Chancellor John Healy. Researchers at the National Institute of Economic and Social Research said Healy faces a 4% real spending squeeze by the end of the decade, equating to approximately $24 billion in 2023 prices because of higher and more persistent inflation, which will create very difficult trade-offs in the next autumn budget. Our economic guru and chief reporter Ali Lyon joins us in the studio now. Ali, just how serious is the prognosis for Britain's finances?
SPEAKER_03Well, it's very serious, uh, not just uh because of what is laid out in this uh really interesting report, but also because of uh that this report does not factor in all of the spending pledges that Andy Burnham has made. This report, as you say, is focused very much on the sort of monetary picture, the fact that uh we are gonna have inflation, really sticky inflation bedded into the economy, and that the researchers don't really see any way in which that that's not going to continue to be the case for the next few years. And also because of that higher inflation, because of the higher interest rates that um the Bank of England is gonna have to pursue, uh, and because of the premium that bond investors will have to put on their investments in UK government bonds uh because inflation will eat into their returns on them, we're also gonna have much higher borrowing costs, which which the report sort of addresses. And what that means is uh much tighter uh fiscal space for our Chancellor and some really difficult decisions, not just at this autumn, but at future autumns to come.
SPEAKER_00And uh NISA economists have said uh because Healy is expected to massively raise defence spending, or at least you would expect so given that he previously resigned because he said there wasn't enough spending on defence, he is going to have to either find things to cut or brace the the UK economy for a third painful round of tax rises because it is impossible to up borrowing. Borrowing costs are just too high as it is.
SPEAKER_03Uh yeah, and I feel like we're already at the stage where um uh sort of the scars that have only just healed over of summer speculation of autumn tax rises, um, have now the the wounds have been picked away at and they're now raw again.
SPEAKER_04Can I can I ask, this this inflation that that um John Healy's gonna have to deal with, is that are they what uh Nisa more specific about is that like macro uh events like war in in the Middle East coming in, or is it what some people have dubbed the moron premium of the kind of more domestic uh actions that the government have taken that might have um inflated uh the pound a bit?
SPEAKER_03So it's a bit of both. Um so on the one hand, uh we are really exposed, as I think we've discussed on on previous podcasts, to international energy markets, are uh the way our sort of energy system is set up and the fact that um we don't have huge nuclear um power uh and domestic power means that uh when there are these big geopolitical shocks, our economy is particularly vulnerable to them. And then on the other side of that coin, as you suggested, sort of looking more domestic, um we have these this vast number of regulated industries, our water industry, our electricity, our energy industry. Um, and what that means is that sort of we have these price caps that take much longer for those price rises to to come through. But then also for when once their shock sort of subsides, we are left with those higher prices for longer. Um, that means that the inflation is sort of stickier than in other other economies.
SPEAKER_04Ali, we had a mixed bag of results uh from the pharma giant GSK on Tuesday afternoon. Bit of a weird time for uh results to drop midday, right? You don't see that very often. Uh, but good for this podcast. Um on the one hand, they're laying off tons of stuff. On the other hand, they've announced a uh huge new UK research campus. What's going on?
SPEAKER_03It was a real do you want the good news or the bad news? Um bad news, bad news first. Um and the bad news um is that uh so uh GSK, massive pharma uh company, London listed farmer company, um they had uh I've got new chief executive, a guy called Luke Meals, and this was his sort of first big pitch to investors. He had one or two other updates. Um and as part of this sort of re-jigged uh GSK that he wants to bring forward and stamp his mark on, he's announced £1.9 billion of uh sort of restructuring, streamlining efforts, uh aka job cuts um that will uh basically the savings from which will be used to help fund the good news, the 400 million pound uh Cambridge research and development site that they've announced, um, and also uh a massive drive uh to ramp up these sort of late stage trials um at the pharma giant because they're facing something called a patent cliff edge, whereby some of their best earning patents are running out, and they need some new patents to help keep the sort of their earnings on the road.
SPEAKER_04Just very briefly, I asked you earlier, uh this GSK are probably one of the only sort of big pharma companies that don't make these weight loss things, right? They're they're dealing in other sorts of drugs.
SPEAKER_03Yeah, so they've just bought a massive oncology um company, so focusing on cancer, um, and this other big uh patent that but that they have that's running out as a really, really lucrative HIV drug. Um but no, they've not they've not really been um that involved in the in the GLP1 uh stuff.
SPEAKER_00Finally, Ali, which FTSE100 consumer goods giant is turning to avocado mayonnaise to solve a slide in consumer demand.
SPEAKER_03So this was I thought a really nice crystallization of the way City AM looks at the muse versus our lesser rivals. Um the FT I went through uh when I was brushing up for this, uh, went for uh World Cup boost, uh uh boost Unilever. Um and the and Bloomberg went with emergency markets added to appetite for dove deodorants. We went with Yankee's demand for uh for avocado mayonnaise uh drives up Unilever's results.
SPEAKER_04The FT and Bloomberg will get there in the end. You know, they're they show potential.
SPEAKER_03It doesn't sound particularly appetizing, I must say, avocado mayo.
SPEAKER_00But this is part of the this is their effort to try and plug a sort of fall in consumer demand that they're seeing from other food products.
SPEAKER_03Uh yeah, so the food division has been one of their least per well performing uh assets over or divisions over the past sort of couple of years, hence why they've decided to sell it to a a sort of uh food and spice giant called McCormick. Um, and in sort of one of the last updates that they'll ever give that includes this food arm, uh, it only grew at 2%, much lower than the wider portfolio. But the silver lining in that was this uh avocado mayo and sort of flavoured mayo that that might be a sort of a growth opportunity for McCormick as as and when it moves on.
SPEAKER_00I think the only downside of getting lots of young people to buy avocado may not is of course it means they then won't be able to afford a house. And that would be trouble. Another generation locked out of home ownership forever.
SPEAKER_04Thank you very much for coming in, Ali. We'll do a blind taste test with you uh very soon, I'm sure. Uh coming up after the break, how would you feel if the government banned you from owning American shares in your ISA? That's the suggestion from OnePensions Chief. Plus, as tech stocks experience a torrid few weeks, what next for the AI stock market rally? All of that coming up next.
SPEAKER_00Now, investors in AI are licking their wounds after consistent declines in share prices in the last few weeks. One benchmark fund that tracks the performance of chip stocks is the Van Eck Semiconductor ETF, the value of which has dropped almost 10% in the last month. Joining us to make sense of where the AI industry goes from here is to Dorman, Chief AI officer at Sabio. So you work in the field of actually rolling out AI to big uh FTSE companies. The truth is these sort of big AI companies are only going to grow if other companies actually adopt their technology.
SPEAKER_05That's true, yeah. I mean, you know, the market has been primed for perfection, really. I think the you know, the expectations that have been set by the leading tech vendors on the capability of this technology. You've got people like Sam Altman saying that all jobs will disappear, you've got Musk saying that uh work will be optional. So expectations have been set incredibly high. Um, but then you've seen research coming out from Anthropic this weekend that's showing that enterprise adoption is lacking behind. Um, and I think that's really what's what's starting to cause some concern. Alongside that, you've seen the repricing of tokens, so they're no longer being subsidized. You know, people are actually aware of how much money they're spending. And at the same time, you've got Chinese models coming out that are dramatically undercutting the American models. So all of that coming together has meant that there's been a lot of scrutiny and therefore uh expectations maybe are being slightly tempered.
SPEAKER_00Is it's part of the issue that um I guess a lot of companies uh a year or two ago did not have particularly well thought out AI strategies. The strategies were, you know, we'll give everyone a Chat GPT subscription or we'll give everyone an anthropic Claude subscription. Uh and a year or two on, well, they've blown through loads of tokens, but they haven't actually got an awful lot to show from it because they didn't really know what they were going to do with it.
SPEAKER_05That's exactly I I think that there is some, you know, there is some um areas where there have been dramatic improvements in productivity, you know, development, software development being one area. But because of this this transition from token subsidization that I mentioned earlier on that happened probably towards the end of May, early June, it really has put a lot of focus on the value that people are getting from AI. And I think that's caused organizations to really start to question which use cases they're applying it to and also which models they're using to fulfill those tasks.
SPEAKER_04Just to boil this down for the non-tech heads, in terms of tokens, we mean a kind of usage allowance that you get over a period of time of like the number of prompts you can use or or whatever. And obviously, the more you use it, you know, it's kind of like an old pay-as-you-go phone. You kind of run down your credit and you use too many minutes, too many texts, yeah. And before you know it, you're asking your parents for more credit to top up your phone. Um, is the only way we're going to make the actual use of AI cheaper by just building a shed load more data centers?
SPEAKER_05I think there are several things that that we can do there. I I think there's a lot of work that can be done around the um efficiency of the underlying algorithms that power AI to make the uh the the the usage of of AI more efficient. But but you know, we're still seeing very high demand, and that will require you know increased rollout of data centers. So, you know, there is still a huge amount of demand that's unfulfilled at the moment.
SPEAKER_04And what is the biggest obstacle in getting businesses and employees to actually use AI? We were saying just before we were recording that I bet you if you go at the pub and ask 10 people how much to use AI at work, you'll get 10 different answers.
SPEAKER_05Yeah. Um, I think it's it's really looking at the application of the technology and thinking about use cases that you can genuinely measure the productivity of. A lot of the work that we do is in the customer service sector, and we we help organizations to apply this technology in the way that they engage with either their customers or their citizens. And there are very clear, demonstrable ways that you can measure that productivity gain, you know, either by reducing the time that's taken to handle the interaction or eliminating that transaction completely. So it's it's really looking for more of those types of use cases where you can measure the impact of the technology.
SPEAKER_00Is part of it um the sort of need for, and at least in some companies, a more of a sort of top-level uh strategy being set as to what the sort of goals or objectives of using AI are, because I've certainly read reports about companies who um gave uh employees bonuses based on how much they used AI. And so the the upshot was people just blew through tokens as quickly as possible because they weren't that bonus, but they didn't have you know an awful lot to ask about it.
SPEAKER_05They definitely that the tok they called it the token maxing era where people are encouraged to use as much AI as possible. We're definitely through that era now based on what we talked about just previously, about this being metered more effectively now. For me, I think it's much more about enablement, training, uh, educating people on how they can look at their job and apply AI to specific tasks within that job. You know, people often talk about AI, it doesn't automate jobs, it automates tasks. And I think it's helping people realise what that can they do in their daily role that can be assisted by AI.
SPEAKER_04And just finally, just because we're out of time, um briefly, what's your prediction on sort of the future of the industry? Do you see more and more businesses using AI and so your kind of AI investors are gonna feel a little bit more uh sort of calmer about things, or do you foresee a much more kind of turbulent period ahead for those big Mag 7 names and the sort of chip companies and all that stuff?
SPEAKER_05I I I've no doubt that we will see significant acceleration in the adoption of AI, but it won't quite happen at the pace that the Mag 7 would like it to, I believe. Um there will be turmoil to the jobs market in the short term, but if you look at a lot of the predictions, Gartner, for example, predict that by 2029 AI will actually be a job creation tool, not necessarily, you know, uh a destroyer of jobs as was once predicted. So I think there'll be some turbulence over the next few years as we adapt to these different use cases, but ultimately this will be a technology that drives uh productivity and drives job creation.
SPEAKER_04Stu Dorman, you're welcome back anytime if we still have our jobs the next time that you're back in and we've not been replaced by some sort of AI. But thank you very much. Great, thank you. And finally, one of the biggest voices in pensions has called for a ban on holding shares of American companies in UK ICES. The chairman of Standard Life, Nicholas Lyons, has argued limiting the tax incentive to investments in London listed firms and private companies in the UK would help revive Britain's ailing stock market and boost economic growth. To see if there's anything in this, we're joined by Brian Burns, Director of Personal Finance at Moneybox, one of the biggest ISA providers in the UK. Brian, is there anything in this?
SPEAKER_02Well, thank you for having me. Um when when these arguments come about, you can, at a certain level, you can kind of see where they're where they're coming from. They're relatively simplistic arguments on the on the face of it, but as soon as you scratch down like one level of detail, in my opinion, they start to fall apart. So if we go back 12 months ago to the last kind of idea that came around stocks and shares and cash ISAs in terms of cutting the cash ISA allowance to 12,000 pounds in the hopes of getting more people to invest, we're still dealing with the output of that now. There's a consultation now from HMRC with loads of new rules and regulations that are incredibly complex. They're going to make stocks and shares ISA investing more complex from April 2027. So it's a similar case with this one, right? I can kind of see the point where it's it feels strange to us to offer somebody tax relief to invest 20,000 pounds in Tesla or whatever that might be. But as soon as you scratch beneath the surface and you start getting into the definitions, this all falls apart the same way that the UK ISA fell apart two or three years ago, when you get into the technicalities of how this stuff works. And what we have to do to get more people investing and get more people investing in the UK is make things as simple as possible, reduce the number of decisions that people uh need to make and reduce the complexity around these products rather than add in more complexity.
SPEAKER_00One thing you can say in defense of uh Nick's argument is um that the share of you know things like pension funds and other investment vehicles uh in the UK that are exposed to the UK or exposed to their domestic market is the lowest basically anywhere in Europe or of any major economy. Most other major economies will have a much larger exposure to their home market. And so something has to be done somewhere to try and rectify that if possible. And perhaps this is just one effort at it.
SPEAKER_02Yeah, I just don't think that retail investors savers money is the solution to capital markets problems. Like these wrappers were created to help individual people save and invest more. And stocks and shares ISIS have been a great success over the last 25 years. Like if we take the data from HMRC 10 years ago, uh there was about 10 billion that was invested in stocks and shares ISIS. We're now up to 30 billion invested on an annual basis into stocks and shares ISIS. The reason that they've been so successful is they're incredibly simple to talk about. They give you tax-free investing, but we need to keep them as as simple as possible. And what we have to stop doing is trying to solve capital markets problems with these retail investing wrappers. So there's lots of reasons why the less money has been invested into the UK as a capital market destination over the last kind of 10 10 or 20 years. But the stocks and shares ISA is not the solution to those problems.
SPEAKER_04I think you also touched on like the simplicity of it. And I I was sort of thinking about this earlier, and I thought um, you know, the Nicholas Line says if you want to invest in Tesla, then you do so and you pay the capital gains and blah, blah, blah. Most people in this country I'm willing to wager on PAYE. They have no idea how to pay capital gains tax. They probably have no idea what it is uh leveraged on. Um and it strikes me that the less the average uh British human being can come into contact with the state, the better. Because the bureaucracy is bad enough as it is. And then if you start having to then uh presumably you would then be filing the tax returns with HMRC for your capital gains and and all that kind of thing, that's going to be incredibly uh overwhelming for your average kind of £40,000 a year executive somewhere who actually never has to come into contact with the HMRC machine because their payroll does it.
SPEAKER_02And you look at the choice that that person has now, right? If you break it down to very simplistic terms, you've got a choice between a cash ISA and a stocks and shares ISA. If you're fortunate enough to be able to put your £20,000 away a year, you can choose between those two wrappers. They're broadly similar. One of them is cash, one of them is invested. 6th of April next year, that will all change. £12,000 on cash ISA. By the way, loads of new rules on the stocks and shares ISA as well. So you've got a 22% charge on the interest paid, you've got restrictions on money market funds, how much of your portfolio you can hold uh in money market funds in the stocks and shares ISA, and restrictions on where you can transfer that stocks and shares ISA too. So we're bringing in loads of more complexity. If we take this idea uh and expand on it a bit further, you'll have more rules about what you can invest in. Okay, you can't invest in US assets, you have to invest in UK assets. But then you get into the definition point, like what qualifies as a UK asset, right? You would logically think a FTSE 100 company, but we all know how much of revenues for FTE 100 companies are internationally based. It's 75-80% of revenues for FTSE 100 companies come internationally. Is Shell really a UK company? Is Rio Tinto a UK company? So when you're comparing and contrasting, again, I get the logic of £20,000 going into Tesla and getting tax relief feels strange, but it all falls apart when you get into any level of detail. And by the way, that choice going forwards is somebody will have a very simple cash ISA where it doesn't have any of these restrictions. Like, what are they gonna choose? People are incredibly busy, they've got families to look after, they've got jobs to do, all that sort of stuff. They're gonna take the simplest option, and that will continue to be the cash ISA going forward.
SPEAKER_00Italy has the Piani Indivali di Risparmio, apologies to our Italian uh viewers and listeners there. That provides a full uh CDT exemption, full portfolios with at least 70% invested in Italian companies. France has the plan de Pan en action. Again, apologies for our French uh viewers and and audiences. That's uh restricted only for um French and EU uh listed stocks. Uh and of course, before the ICER in the UK under uh uh Nigel Lawson, uh Thatcher's chancellor in the in the mid-80s, we had the personal equity plan, which was again restricted only to UK listed assets. So it's not without precedent. Surely it's been done before, it's been done elsewhere. So it could be worked out.
SPEAKER_02It could be worked out, but not in a simple fashion. There is no quick and easy fix to these things. And this was the same argument that I was making 12 months ago when the Cash ISA rumors were were about. We are not starting from a blank sheet of paper here. We are starting from 25 years of history from PEPS, Cash ISA, stocks and shares, ISIS that people are are used to. And you would need to amend those rules and regulations rather than starting from scratch. I agreed with people last year when they said, okay, if we want to incentivize people to invest, theoretically, would we have the same ISA allowance for cash and stocks and shares? Probably not. We're not starting from a blank sheet of paper. So you're taking away something that people are used to and you're adding in significant kind of complexity. And it's the same argument here. If you're starting from a blank sheet of paper, would you incentivize somebody the same way to invest in an overseas stock as a UK one? Probably not. But we are not starting from a blank sheet of paper here. And in order to make things, these things work, we have to add in more rules, more regulations, more complexity, which is exactly what we should be trying to get rid of.
SPEAKER_04Brian, uh, we just have to wrap up for time reasons. Very, very quickly. Uh, you're the biggest providers of the lifetime ISA in the UK. Broadly happy with the direction the government's going with reforming that? No. Okay, well, Brian, thank you very much for coming in. Very grateful. Well, that's just about all we have time for today. Thank you very much for listening to or watching Business as Usual.
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