Buying British: dividends, defence and diversification

A new year brings fresh opportunities and uncertainties. With forecasts for UK markets in 2026 split amid shifting expectations for interest rates and inflation, investors are asking: what’s next? 

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Re-watch interactive investor’s Victoria Scholar, Ruffer fund manager Jasmine Yeo, and James Harries, of STS Global Income & Growth Trust, as they assess the outlook for the FTSE 100 and FTSE 250 and consider whether UK markets could deliver another resilient year.

They’ll also explore dividend opportunities, the role of mining and defence stocks, and why diversification remains key.

Transcript starts:

Victoria Scholar: Hello, everyone, and thank you so much for joining us for this special webinar. My name is Victoria Scholar, and I’m head of investment here at interactive investor, and I’m going to be hosting today’s webinar.

The discussion is going to be buying British dividends, defence and diversification. So, I hope you like alliteration there. We’re essentially looking to get some expert perspective on the outlook for the investment opportunity in the UK.

We’re aiming to run for about 40 minutes. So, we’re going to start by introducing our guests. Then we’re going to have a discussion around the table here, and then we’re going to be going to Q&A from the audience.

So, a couple of things to mention just before we get started. First, this webinar is for educational purposes only and does not constitute financial advice.

Second, we would love to hear from you. We’ve already had some truly excellent questions in advance and they’ve really helped to shape today’s discussion. So, thank you so much for those. And if you haven’t already written in, then do head to Slido and you can use the event code, which is 1857610, and you can add your questions there and they’ll come directly to me.

The Slido code can also be found underneath the YouTube description, so you can check it out there. And you can also scan the QR code, which should be on screen now. Also, it’s worth mentioning that popular questions will be given priority. So, if there’s a question there that you quite like, then make sure to give it a thumbs up and it’ll get pushed up and you’ll be more likely to be answered.

And, if this video all feels a bit too complicated, don’t worry. Just post your questions in the comments on the YouTube section, and we’ll try and get to those as well.

Before we start and get to our guests, we have been running a poll. The question is, how much of your portfolio is held in UK stocks? Is it up to 25%, between 25% and 50%, between 50% and 75%, and, yep, you guessed it, over 75%? So, that poll is currently running. It’s still on the Slido now. So, if you’re interested in casting your vote, we’ll be able to reveal the winning answer at the end.

I’m a little bit conscious of time. We’ve got about 40 minutes, just under now, so I wanted to begin by introducing our wonderful panelists who we have with us.

Jasmine Yeo is to my direct left, co-manager of the Ruffer Investment Company (LSE:RICA), a wealth preservation investment trust. She joined Ruffer in 2017, graduating from Warwick. She began life at Ruffer on the private client team before becoming an investment specialist and then a fund manager, a macro generalist and a Ruffer lifer.

And then we’ve got James Harries, fund manager of STS Global Income & Growth Trust Ord (LSE:STS). James runs a global fund, but at the moment it’s showing a particular preference for the UK. The portfolio has about a third in the UK. And that is obviously significantly higher than the global stock market, which is about 3% in UK shares. So, lots to get into there.

So, I thought we’d kick off, Jasmine, with you. If you could just start by laying out your investment case for UK equities versus global markets.

Jasmine Yeo: Yeah, absolutely. So, I guess we all know the story from a backward-looking perspective. It’s been a difficult place to be invested, really for a number of years. For lots of, quite frankly, good reasons, there’s clearly been a lot of political uncertainty ever since Brexit. Kind of sectorally, the UK has been out of favour in a lot of tech, certainly relative to the US, and all that led to the UK being at a pretty attractive discount versus its own history, and also relative to the rest of the world.

Last year things got a bit better. The UK market came back to life and I think the important question for investors today is, was that sort of a blip? And are we going back to where we’ve been, or, actually, is that the start of something new and maybe some green shoots showing? Our perspective is that it is an attractive place to be. And, actually, that 2025, and it’s continued into this year, sets the tone for what we think is an interesting place to be invested relative to perhaps other global markets.

Certainly, on the valuation side, it’s fair to say that after last year’s performance, you have seen the market rerate. So, I think in absolute terms, the UK is not as cheap as it was, it’s not in the bargain bin, as it were. But it’s certainly still at a discount. Certainly, as I say, to the US, sort of 30 or 40% cheaper.

Sentiment is still pretty subdued. And I think the interesting thing is positioning remains pretty underweight both for retail investors, but also institutional investors. So, I’d sort of give it a two and a half out of three if you’re looking across that framework of valuation sentiment and positioning.

What that means is that you don’t necessarily need to see the UK become super, super exciting or a boom time for growth and productivity, it actually just needs to see it get a little bit less ignored by investors, and that can lead to quite an interesting outcome.

Victoria Scholar: OK, so obviously we had that very strong performance last year, and that created a bit more interest in the UK this year. But, James, a lot has changed hasn’t it, since the 28 February. You know, we’ve got the war in Iran that sent oil prices above $100. That’s creating resurgent inflation concerns and worries about UK growth and global growth. And we’ve seen that impact different sectors hard, in different ways. So, we’ve seen travel and airlines, for example, getting hit pretty badly whereas defence and oil are outperforming. How do developments so far in the Middle East affect your UK outlook?

James Harries: Well, it’s a big question, but just to echo what Jasmine is saying, I think that the UK is attractive, not just because in and of itself, but because of what it isn’t. Particularly the US, which has been the most incredible market for a very long period of time. But we’re now left with a position whereby the US is very highly concentrated, very highly correlated and very fully valued.

And of course, the reason for that is because of the very large, tech companies are dominating the index, but also that the spending that they’re doing, the capital expenditure on AI, on artificial intelligence, has been driving so much. It’s been driving activity in the economy, it’s been driving performance in the stock market, and it’s been driving consumption via the stock market via the wealth effect.

So, all those three things go into reverse, you could have a much more difficult time in the US, not just in equity markets but debt markets and with the currency as well. Conversely, the UK therefore looks relatively well insulated. Now, there’s always the old adage that if the US sneezes, the rest of the world catches a cold, but valuation is a bit of a protection in this.

Now, on the topic of Iran, this is obviously a massive topic and obviously very topical, but in the short term, the UK again looks relatively good because it has a lot of exposure to areas like oil and defence, which as you mentioned, have been going up.

But, actually, longer term, it shouldn’t have such an important effect. In fact, the effect of oil on economies is quite interesting. When it spikes very aggressively like this, in the short term it’s inflationary, obviously, because it just puts up the price of oil. But in the long term it sucks demand out of the economy and is probably more recessionary than inflationary.

So, you get a shorter-term inflationary effect, longer-term negative growth effect. So, to us, following the very strong performance of the UK market last year, which is led by areas like, mining, oil, banks, we think they’ve actually rerated quite materially.

And the more predictable, less cyclical, more predictable businesses, the sort of things we like, actually, are at relatively good value. So, we’re quite positive on the UK, but not necessary for the reasons that you might have suggested.

Victoria Scholar: OK. So, Jasmine, I think it’s interesting when we think about the strong performance that we’ve seen in UK markets last year, for example, against the fact that the economic fundamentals probably aren’t quite there. I think that has become more challenging lately, not least with the GDP downgrade that we got in the Spring Statement on these inflation risks as well. So, how do you kind of weigh that up in your mind?  The divergence between what we’re seeing in markets versus the underlying economy in the UK.

Jasmine Yeo: Yeah, I mean it’s definitely true that at the back end of the last year, particularly around the Budget, you did see some very significant headwinds for UK corporates and households in the economy.

I think, actually, the macro story, some of the fundamental data is something that we think is actually quite supportive for the case of the UK. So, we’ve already talked about from a valuation perspective it’s interesting, sentiment, positioning. So, that creates quite an attractive starting point. But then we do think the macro, slightly counter, is actually starting to turn, and there are some green shoots there as well.

Looking at some of the Q1 data, and I would acknowledge that it’s early days, but things like retail sales look pretty strong, sort of 5% or 6%. PMIs have been pretty strong, the economic price index is kind of turning in the right direction. Employment is on the weaker side, job growth has not been great, but there are some signs it’s kind of starting to stabilise, which is good news. And then, of course, there has been, notwithstanding, as you say, recent events, a kind of underlying disinflationary impulse in the UK.

So, we think - and I’m very happy to talk a bit more about how the current conflict impacts this - the door is still open to rate cuts in the UK, and that could ultimately be a catalyst, we think, to a bit of an improvement on the domestic front, and the element of this story that doesn’t get so much attention, and one of the reasons there is so much negativity in the UK is because the public sector side of things is pretty doom and gloom.

You’ve got a debt to GDP ratio that is almost a 100%. That is a real constraint on what the government can do. But actually, the reality is that on the private sector side, so, corporates and households, they are in pretty good shape, and I think that deserves a bit of attention. So, versus where we were in 2008, the global financial crisis, the private sector has massively deleveraged, with the debt to GDP ratios sort of half of what they were.

So, there’s plenty of balance sheet space for the private sector to start borrowing more and sort of create this credit impulse. And in terms of coming back to what’s already in the price, perhaps, new levels of borrowing in the UK, are just 3% of GDP. Now, that’s not very far off the absolute floor of zero. Again, where we were in the financial crisis, where we were when rates were going up in in 2022.

So, we actually see a combination of some of the macro data turning, and then this sort of asymmetry in terms of the potential for credit growth…catalysed by interest rate cuts. And that makes interest rates sectors, sensitive sectors, an interesting place to be, we think.

Victoria Scholar: Yeah. I’m interested that you’re still expecting some interest rate cuts, given everything that we’ve seen in terms of energy prices and the risk around inflation that have kind of come up in recent weeks. What’s your near-term outlook for the Bank of England?

Jasmine Yeo: Yeah, I think it’s worth acknowledging what’s shifted or how markets have sort of repriced interest rate cuts over just the last week or so.

So, investors were expecting some two to three interest rate cuts this year. There are now expecting less than one. So, I think it’s absolutely right that we should be rethinking about the possibility of interest rate cuts this year, and how the Bank of England can behave.

Slightly to the point previously, energy shocks can be temporary and that has kind of been the case historically. Often central banks will choose to look through them. But the fact is that you have already had this big move in pricing. So, a 30, 40 basis point move, in short-term interest rates. So, the challenging outcome is kind of already there in the UK curve.

So, really from a starting point of today, let’s think about gilts potentially as a tactical opportunity. They’re actually quite well set for if things do get better and you do see a bit of a de-escalation. And, arguably, given the midterms are coming up from Trump’s perspective, we could well see a TACO [Trump Always Chickens Out] in a few days’ time. But, of course, lots and lots of uncertainty remains, and it is something to watch very, very carefully.

Victoria Scholar: OK. So, in this interest rate-cutting environment, James, obviously dividend stocks can be an attractive place to be for investors. And I know that you invest in a lot of global dividend-paying companies with a significant allocation to the UK. You’ve got names like British American Tobacco (LSE:BATS), Reckitt Benckiser Group (LSE:RKT), Rentokil Initial (LSE:RTO) and some others. Do you want to highlight a couple of your high conviction, dividend stocks with me?

James Harries: Absolutely. I’m a Troy asset manager and in Troy we try and put a premium on the downside. We try to produce defensive, predictable low-volatility portfolios. And in my case, we’re trying to generate an income as well because it’s a global income mandate.

Similar to the Trojan Global Income O Acc fund that I manage. So, actually, the UK is really fertile ground for those sorts of businesses, particularly the case when they’re trading at a discount. So, each of the ones you mentioned are actually really good examples.

So, British American Tobacco they may not be everyone’s cup of tea from an ethical perspective, but actually we think they’re much more akin to nicotine consumer products companies these days. They’re not going to be tobacco companies much longer.

Victoria Scholar: Their business models have changed a lot.

James Harries: Absolutely to a much more sustainable, much less harmful business model. And obviously the shares have rerated as a result, but they still look pretty good value, both in absolute terms and relative to their peers around the world.

The segment you mentioned, which I think is really interesting, is Rentokil. That’s not obviously the most glamorous business. You know, rat catching and pest control. But it has a competitor in the States called Rollins Inc (NYSE:ROL), which is much, much more expensive and makes Rentokil look extremely inexpensive.

Now, the thing about Rentokil is it made an acquisition in the States, which has been a real headache for them. It’s often the way when companies make big mergers and acquisitions, we’re usually skeptical about that.

But in this case, we think it’s ultimately a pretty good asset. And we think ultimately Rentokil will be able to turn it around. And yet it’s trading at a pretty dramatic discount to, as I said, its US peers. So, the business is actually inherently very predictable. People need pest control. One of the things, it’s a global business Rentokil, and as people get richer, one of the first things they spend money on is getting critters out of the house.

It’s not disrupted by AI, and so on. So, actually, it’s really interesting, and a much higher-quality, business than we think people perceive and therefore I think it’s a really good - it’s actually moved a bit already - business to be investing in.

Another one I’d mention is IG Group Holdings (LSE:IGG), which many people will recognise as the dominant, spread-betting company in the UK. The fact that it’s dominant means it has the tightest spreads, i.e. you can trade most cheaply, which is a sustainable competitive advantage, which is why it’s such a good business.

The business has struggled to grow for a while, but it has a new CEO that we’re very enthused by, and the core business is beginning to show growth for the first time in a long time. And therefore what you have is a high-quality, high return on capital platform business effectively, which is now being managed the way we think it should be in the sense that it’s harnessing technology to both attract new customers and to make the interaction with clients more user-friendly. And for all those reasons, we think it’s a really good business.

But of course, it’s looks and it’s valuation relative to platform businesses of a similar type in the States is incredibly inexpensive. So, they’re actually really good examples of global businesses or high-quality businesses that are trading at a discount that happen to be listed in the UK.

Victoria Scholar: We saw quite a lot of share buybacks last year in the UK. What does that mean for dividend growth? Does that make your life harder at all?

James Harries: Well, we don’t mind giving up buybacks at all in the sense that when a company is buying back its stock, as long as they’re doing it in a value-conscious way, a buyback at a cheap price is a good thing for existing shareholders. That is the opposite if it’s a more expensive price.

So, we do try and encourage our management teams to think in terms of buybacks as another capital allocation decision. You can spend money, you can pay a dividend, or you can buy back your own stock.

Now, as a dividend investor, we want dividends and we’re keen on dividends…if a company’s doing a buyback, we don’t include that in our distribution yield because we can’t give that back to our investors.

But we do view it as an additive part to an investment case if the company is both inexpensive and well capitalised enough both to invest in their business and buy back stock. So, we’re quite happy for companies to buy back stock as long as they continue to pay their dividend.

Victoria Scholar: And Jasmine, what about you? Where do you see the sector opportunities in the UK? Because there seems to be a lot of moving parts and we’ve seen quite a lot of volatility, this year and some real winners and losers in terms of sectors, which means obviously some are more expensive and some are cheaper. Tell us where you see the opportunities, where are things kind of undervalued or not being priced in.

Jasmine Yeo: Yeah. It’s definitely been a feature of this year. At index level, things have looked fairly benign but under the surface, there’s been some really, really significant moves. And perhaps the way that’s most obviously played out is around AI disruption, the risk of agentic AI.

Victoria Scholar: Which we’ve barely mentioned so far today.

Jasmine Yeo: Which is extraordinary, right? We were just discussing this before. I think it’s the perfect example or reminder perhaps to investors about how the investment environment we’re operating in today is moving so quickly. It’s so much more volatile than a really kind of long quite benign period, and so I think investors need to be alive to that.

There’s lots of portfolio construction implications that we could perhaps touch on a bit later. But if you’re thinking back to that AI story, to remind people about that in the first couple of weeks of the year. The US, obviously, has been hugely impacted given the tech exposure in the index there. But the UK has not been immune either.

We’ve seen a number of names, kind of previous market darlings, whether that’s Sage Group (The) (LSE:SGE), RELX (LSE:REL), London Stock Exchange Group (LSE:LSEG), all these data platform-type providers, sold off really quite sharply and have been for a number of months. The threat there being, actually, if we’ve got agents, not just LLMs doing Q&A, it actually can do some work and automate those processes, then are these businesses that have huge moats no more? And, actually, we’ve seen this rerating dynamic.

So, it’s been pretty indiscriminate. I think what that creates for investors is an opportunity there. Certainly, you know, this is a real risk. And investors need to be really careful. And I think appraising the businesses and their moats, specifically from a bottom-up perspective, but an area we get quite comfortable in and somewhere we’ve been having a little nibble is in some of the data providers. So, Experian (LSE:EXPN) perhaps being a good example of that. So, it has been operating for 200 years, kind of collecting proprietary, high-quality data around credit scores.

That’s interesting to us because from an AI perspective, that should make that proprietary data more valuable, more interesting. If agentic AI is going to need quality, accurate, reliable data inputs, and use some of the tasks that data is used for, whether that’s kind of fraud, ID detection, lending decisions, that needs to continue. That’s essential information. So, that looks kind of interesting to us.

Tying back to what I was saying perhaps about interest-rate sensitive sectors, we think the house builders are quite interesting. I don’t think they’re necessarily going to double on a short-term view, but structurally, I think they look quite interesting. Clearly, they will benefit if this rate-cutting cycle can continue. They’ll see a pick-up in affordability and demand in terms of their order books. But, again, kind of from a bottom-up perspective - and this is what we like to see, that kind of asymmetry, an opportunity, both from a top-down and a bottom-up perspective.

Pretty solid balance sheets, a number of them, good management teams, trading pretty cheaply, looking at price to book, as Goldman Sachs highlighted recently, at 10-year lows. And also, you obviously have a political emphasis on increasing housing supply and affordability. So, that also looks like an interesting theme to our minds.

Victoria Scholar: Yeah, it’s interesting, these big sell-offs that we’ve seen driven by AI and they are quite indiscriminate, like you say, and that obviously means that a lot of stocks are getting unfairly punished, and that does create opportunities for investors like you.

James Harries: Just to come in on that, what happened in the software sector was very interesting because it was partly a result, obviously, of people shifting their view on the extent to which these companies can defend their business models and defend their competitive advantages in a world of agentic AI.

But it was also because they got really quite expensive. And in a world that’s much less certain or much less secure, and it always feels, insecure, if you like, or uncertain, but it really is much more so than arguably it has been for years, then valuation has a bigger role to play, we think. And so that’s a function of that too. Maybe it was that AI was the catalyst that led to the de-rating, but it may have happened anyway.

Victoria Scholar: All right. Brilliant. OK, we’re about 20 minutes in. So, we’re going to move on now to our Q&A from our viewers. Thank you so much to everyone who’s written in with a question. We’ve got lots of questions to get through.

We’ve got a couple here. I think these are for you, James. One from Steve, one from Terry, both on the dividend theme. Kind of similar. Steve’s saying other than investing in equities for good dividends, are there other options for securing good income? He says 8%, 9% or 10% annual income. I’m not sure if that’s too ambitious.

James Harries: So as you mentioned earlier on, I’m not here to give investment advice, but what I would say is that securing those sorts of dividends usually comes with a lot of risk. Unless you’re investing in credit, when credit spreads are very high, which they are very much not at the moment, spreads are really pretty tight. Much like you might expect, given the uncertainty. But there you are. That’s where we are.

From an equity perspective, we think that a sort of 3% dividend yield in aggregate, which is made up of some which are higher and some which are lower, is a sensible area to look at. One area I think that is still very attractive for income is low coupon short-dated gilts, particularly for taxable income, because you end up gaining from the capital gain and you don’t really pay any tax on the coupon.

So, that is still an opportunity that’s available to people, and off the recent sell-off, more so. I would caution against trying to reach that much for yield. But there are areas where you can get income.

Victoria Scholar: OK, brilliant. And, Jasmine, just leading on from the gilt comments there, Jay has said, do you think investing in gilts is a good idea, considering that gilt prices are falling and yields are rising? What are your thoughts broadly on the UK bond market at the moment?

Jasmine Yeo: Yeah. So, I think tactically it does look interesting…We have seen a pretty sharp move. As I highlighted earlier, you are kind of already pricing quite a bad outcome and quite a significant energy price and inflation shock in the UK.

So, in the case that this does de-escalate, and this is a war perhaps measured in weeks rather than months, there’s maybe an interesting tactical opportunity there, I think. And I say that word specifically tactically, because our perspective on, certainly nominal bonds, is quite cautious. You’re taking a more structural view. Obviously, bonds have been a kind of ballast of a balanced portfolio for decades, really. We still think they will have a role to play. You know, I just highlighted an opportunity today, perhaps.

There will be moments in time, periods of disinflation like we’ve had the last couple of years, where bonds will be a nice place to be. But thinking back to 2022, which was an awfully long time ago now, but we mustn’t forget periods of high and rising inflation - we’re seeing hints of that again today - bonds can be very painful asset class to own.

So, our perspective on that and on constructing a balanced portfolio is that perhaps fixed income is no longer the sort of straightforward buy-and-hold asset and protection against equity market falls that it perhaps was. And that investors maybe need to think a little bit differently about diversification in portfolios over the next years and decades, and look to things like real assets and commodities - we haven’t touched on yet, but we think it’s quite interesting - and uncorrelated strategies and maybe even derivatives if used carefully.

Victoria Scholar: OK. So, you think commodities could be a good place to be to kind of hedge against equity market downturn in a period of rising inflation?

Jasmine Yeo: Yeah. If the driver of that issue and equity markets is high and rising inflation, again, thinking back to that 2022 playbook, yes, commodities. And this is certainly what the kind of academic research highlights. Through periods of high and rising inflation, the best asset class you can own is a diversified basket of commodities. So, that could be a mixture of precious, but also industrial, metals. They do tend to perform well. We’re seeing that now in terms of the oil price.

Arguably, the challenge sat here today, as we’ve highlighted, a lot of the stocks, for example, in the FTSE 100 that are exposed to that theme have done pretty well over the last year or so. Is this a theme that investors want to be piling into right here, right now, with the oil price where it is? Perhaps not.

Having said that, I think what’s interesting is some of the oil majors, obviously BP (LSE:BP.), one of the larger names, it’s moved a little bit, but spot oil has moved an awful lot further. And, actually, the longer this conflict goes on, perhaps the more investors and analysts are going to have to rethink their base case for oil over the longer term, and it’s longer-term oil prices that those equities respond to. So, it may be a little bit of an interesting catch-up play with some of those oil majors.

Victoria Scholar: OK. James, on that topic of commodities, specifically precious metals, and it’s a little bit off topic, but given that Fresnillo (LSE:FRES) has been such a big part of the FTSE 100 story, I think it’s worth bringing in. Mike asks, are exchange-traded commodities (ETCs) for gold or silver a safe investment compared to physical holdings in secure storage with your name attached?

I’m curious, is gold still a safe haven, given what we’ve seen in terms of price action and the extreme valuations that it’s at right now?

James Harries: Yeah. I mean, for all the reasons that Jasmine was mentioning, we would absolutely echo that. The extraordinary thing in a sense is, if you go back to the global financial crisis, the problems are in the banking sector, in the private sector, and governments are actually relatively well financed, and they’ve done quite a good job over the last few years of changing that, much to the worse.

So, what you now have is that the risks really reside in the public sector and in government finances, and much less so in the consumer and corporate, which is a kind of interesting flip.

The implication of that is that if you are looking for income, particularly in an inflationary environment, then company dividends, which can grow in real terms in an inflationary backdrop, are a much better place to look than fixed income.

The other point that Jasmine mentioned is that bonds are probably not the diversifier and not the thing that they were, except for tactical reasons.

Now, related to that, gold therefore probably, notwithstanding the fact that it’s gone up in the short term, remains a very interesting way to gain exposure to effectively people’s concerns about government balance sheets effectively.

Gold is going up really because everything is going down. What I mean by that is that money supply is increasing and the value of other assets is declining as a result of that in real terms, and gold tends to hold its value over long periods of time.

So, our view is, yes, gold is a decent diversifier, and it’s worth holding a proportion of it in your portfolio. To directly answer the question - famous last words - but I actually do think that physically backed ETCs are perfectly sensible place to invest if you’re gaining exposure to gold. It’s not quite as secure as owning a physical bar with your name on it, but it’s liquid, and a pretty low cost, pretty effective, pretty convenient way of getting something that is pretty secure.

Jasmine Yeo: Just adding to that, I agree with lots and lots of that. One of the interesting things about getting exposure to gold, and to the point on physically backed or otherwise ETCs, of course, owning commodities directly, you need that price to keep going up to make some good returns.

One of the ways we’ve been expressing that view around gold, notwithstanding the recent performance is actually continuing to own gold mining companies, which have done fantastically well. A lot of the larger-cap names particularly, but some at the smaller-cap end of the spectrum. Actually, what’s interesting is they’ll probably continue to do quite well and we think have the potential to rerate, sort of regardless of whether gold keeps going up.

Now, of course, if the gold price craters, the equities are not going to enjoy that, but it is perhaps a way of expressing, or getting exposure to the gold price without relying on the metal continuing to behave in the way that it has.

Victoria Scholar: OK, great. We’ve had, a question here from Jim - a slightly different direction here - about emerging markets. He says that Redwheel Global Emerging Markets R GBP Acc fund has been losing value amid everything that’s been going on with Iran. He wants to know the impact on funds like this. So, I guess the question is really about how the Iran war is weighing on emerging markets, and does it impact your view on EM versus DM? I don’t know if either of you want to take that.

James Harries: We’ve got a relatively constructive view on emerging market economies in the sense that we think that - and I’m sure that Jasmine would probably say the same thing – the dollar has been so dominant for so long.

Capital goes to where capital is best treated, and the US has become at the margin, a less attractive environment in which to invest both in debt and equity markets. Equity because what I was saying about AI, and debt because of the level of debt in the government sector, but also because of the, frankly, political sort of shenanigans that’s been going on in the States.

So, you put all that together, and it probably means that the dollar has probably peaked for a while and structurally, therefore, is going to be relatively weak, and therefore, the flip side of that is that commodities are likely to be relatively strong.

There are lots of emerging market economies which are great beneficiaries of the strength in commodities, because it leads to a structural positive shift in the terms of trade that those economies have. And therefore, you can find a number of businesses, which are high quality but also benefit from the dynamic which I’ve just described.

In the short term, of course, the dollar’s going up, which is interesting, it’s finally acting as a safe haven and other currencies are going down. That’s all to do with the problems in the Middle East, and therefore we’re getting quite a big counter trend move in a number of the things that I’ve been talking about, including commodity prices, oil prices, the dollar, emerging markets and so on.

But I actually think the long-term 10-year structural trends that I’ve just been describing are likely to reassert at some point, but it’s impossible to know when.

Victoria Scholar: Do you think that the direction for the dollar is higher from here? I mean, because obviously, do you think it got oversold, and there was too much going in that direction after such a long period preceding it going up?

Jasmine Yeo: So, I think it really matters what’s driving what’s currently going on. And it’s very centered on what’s going on in the Middle East, and why markets care so much is about energy prices. The US is energy independent, so is much more insulated from this versus, say, Europe and particularly some Asian markets, which is exactly why you’ve seen equity markets respond in the way that they have. The Asian economies were very badly hit, Europe not great, but actually the US - I mean, let’s see what happens today - but the S&P has actually kind of been all right thus far.

Victoria Scholar: The energy prices have been quite insulated as well compared to in Europe and Asia.

Jasmine Yeo: Yeah. So I think that’s why you’re seeing this kind of dispersion across global equity markets and why, as you say, the dollar has been behaving as a safe haven. I think it’s absolutely right that going into this positioning was very short in the dollar. And so having that force unwind is going to have an impact as well, so a little technical element to that.

But we would absolutely agree that longer term, and kind of more structurally, the dollar has been a fantastic place for investors to be. It’s helped cushion sterling portfolios in a risk-off environment and has been that safe haven.

But a bit like bonds, we think it’s going to be much less reliable because of this “sell American” narrative, this unwinding of US exceptionalism, which we do think has legs and will be a driving theme for investors in the coming years. And therefore, we need to perhaps look elsewhere for those safe havens.

Victoria Scholar: So, what does that then mean for the pound? Because we’ve had a question about cable, the outlook for cable exchange rate. How does that flow back to the dollar, impact sterling, and in turn UK investments?

Jasmine Yeo: Yeah. So, there’s always two questions when you want to own foreign currency. If you don’t want to own sterling, what are you going to own it against? There’s the dollar. Our favored safe-haven currency is the yen. We think it’s been extremely undervalued, and has been for many, many years now. But there’s some real shifts going on in Japan, both in terms of the politics, Sanae Takaichi winning her two-thirds supermajority, and desire for more fiscal expansion. So, again, it’s not just the US now.

Victoria Scholar: Intervention potential?

Jasmine Yeo: Yeah, you saw the rate check a couple of weeks ago now, which also feels like a very long time ago. So, we’re thinking about the yen and the role that it perhaps could play if things worsen and market starts to sell off meaningfully.

Why does this matter for investors and particularly sterling-based investors? The fantastic thing about constructing a sterling-based portfolio is that you can use foreign currency as a source of protection. Because sterling typically goes up when things are good and it goes down when things are less good.

So, it’s a really interesting, potentially valuable source of protection for investors to perhaps own foreign assets, but own them unhedged. It’s just a question of which currency you own on the other side.

Victoria Scholar: OK. Do you want to add anything?

James Harries: We’re agreeing on quite a lot! Sterling’s actually been pretty strong. We don’t have a particularly strong view on sterling as a result of it having gone up for quite a long time, but not necessarily against the US.

Cable is hard to call because we think the US would also be quite weak. But I echo the points that as a global fund manager to be able to diversify out of sterling, particularly at a time when it may be that other currencies are somewhat stronger relative to both sterling and the dollar, may well be a sensible thing to do.

Victoria Scholar: OK, we’ve had a nice question here from Adrian about the outlook for UK banks. Jasmine, perhaps for you. Are UK banks good growth and dividend-paying investments for 2026-27?

Jasmine Yeo: So, another sector that had a fantastic year last year and you saw them up 100%, which feels unbelievable for a UK bank, having been out of favour for such a long time. It’s a great question; are we going to see another good year or are they fairly priced now?

It’s a bit like the market more broadly, I think, in absolute terms, not clearly as cheap as they were. But, actually, looking at the fundamentals, returns on equity are really quite impressive. Barclays (LSE:BARC), almost 20%, certainly high double digits. So, they are in a pretty good position. Credit standards in the UK have been pretty good. And it comes back to this idea of if we can get rate cut, we can get an upswing in the credit cycle, then the banks are going to be very well placed for that.

Victoria Scholar: OK, great. Then we’ve got a question here from Jim. This is about Rolls-Royce Holdings (LSE:RR.)shares that have been losing value because of reduced flying hours over the troubled Middle East zone of military activity. He is asking, is that the case? It’s interesting because we’ve seen a lot of these defence stocks outperform, but Rolls-Royce has been punished. Is that more because of its commercial side?

James Harries: Well, we don’t own any Rolls-Royce…we’re generally quite skeptical on defence companies on the basis that there’s only really one buyer, which is the government. And for that reason, the returns or the underlying returns on capital, on defence companies generally aren’t that fantastic. Rolls-Royce has actually been a bit of exception to that, but it had been through an incredibly difficult period before that, before this kind of renaissance.

Yes, I think it is suffering because rather like other companies exposed to a similar dynamic as you were describing earlier, Rolls-Royce is probably absolutely suffering for that. But it’s a broader business than that. Specifically on the question, yes, I think that’s why.

Jasmine Yeo: We have had some in the portfolio. It has been an extraordinary stock, up almost 1,000% in the last five years. And yes, James, is absolutely right, and that commercial element of the business is still a big driver of its profits.

Another thing I would add is that going into this, the valuation was very punchy. So, this comes back to the distinction perhaps investors need to be making around where there’s really interesting structural themes - defence, an increase in defence spending, NATO hiking their spending targets as a percentage of GDP.

But then where valuation is and, as I say, expectations were sky high. So, when you do get these wobbles and these impacts, even in the short term, you can see quite a dramatic impact on the share price.

Victoria Scholar: OK. Brilliant. I just want to ask for investors thinking about the UK. Obviously, the obvious place to start would be the FTSE 100, which is very much an internationally focused market, whereas the FTSE 250 is much more of a domestic gauge. If we’re thinking about the opportunities in the UK, where is the best place to start do you think?

James Harries: You’re right in the sense that if you are looking for “UK UK exposure”, businesses that are listed in the UK and have business in the UK, then the FTSE 250 is a fertile ground to look.

This is somewhere where we maybe do disagree slightly. We’re not that optimistic about the outlook for the UK economy itself. Our point is much more that there are some great businesses listed in the UK that look relatively inexpensive relative to their global peers. And so conversely, if we look at what we own, they’re usually much larger companies and we’re quite happy with that.

So, we wouldn’t necessarily wish to express a particularly strong view on the 250 per se. But I would say, again, echoing some of what we were saying earlier, there are some high-quality businesses in the UK that have come down really quite a long way now. And they’re not the kind of mining, energy and banks that have done so well. Therefore it continues to be a really quite interesting market for us.

Victoria Scholar: OK, brilliant. One question ties back to our poll, which is asking our audience how much of their portfolio is in UK stocks. What we tend to see in terms of ii portfolios is that there’s a lot of home bias, and obviously it tends to make sense because we know our own economy, and our own companies probably a lot better than, say, we do companies in Japan or South Korea, just naturally.

Do you think that having a home bias in a portfolio is an advantage, or is it something that you should be conscious of and trying to look more internationally, so that you don’t suffer from that somehow?

Jasmine Yeo: Yeah, I think it’s relevant in both directions. It can be an opportunity when that underlying home market looks attractive, which we’ve been discussing all morning. Coming back to your point right at the start, if an investor owns a global equity index, they might feel quite well diversified, like they’ve got a stake in the UK, but it’s only 3% compared to the US, at north of 60%.

So there definitely is some value in lifting the bonnet on that exposure and seeing what’s going on underneath. And, as we talked about, we like the UK, but clearly that can work in the other direction. For investors, it’s about really thinking about that risk/reward that is available, not just what they’re comfortable with, what they’re familiar with, but asking whether their portfolio is well set up for the years ahead.

It kind of comes back to our observation that we are living in a really different environment now for investors, and perhaps the portfolios that have worked really well from 2010 to 2025 are not the same portfolios that are going to work pretty well from 2025 to 2035.

So, I think the UK is part of that, your question mark over bonds and the dollar, as we’ve talked about, and a need for perhaps a focus on hard assets given this inflation volatility and inflation risk.

Victoria Scholar: OK. And then just finally, James, we’ve seen quite a lot of worry lately about this UK market exodus and the fact that we’ve seen quite a lot of big companies like Flutter Entertainment (LSE:FLTR), Ashtead Technology Holdings Ordinary Shares (LSE:AT.), Wise Class A (LSE:WISE) and ARM Holdings ADR (NASDAQ:ARM) shift their listings abroad.

And there’s been a lot of questions about London as a key global financial hub post-Brexit. But now with a resurgence in performance and a renewed focus on the UK, does that change the game for London as its position in the world of finance, do you think?

James Harries: I guess time will tell. It has been slightly one-way traffic for quite a long time for the poor old UK. The reality is that the US particularly is a broader, deeper, more liquid market. And you can see why companies might be attracted by having a listing there. Particularly if they have a lot of business there, and they tend to attract a higher multiple and they have to be more liquid.

That is a bit of a one-off though in the sense that, ultimately, the performance of a share price ought to correlate perfectly with the growth and underlying free cash flow of the business and not where the company is listed. Having said that, when I started investing many decades ago, the UK was a much, much higher part of the global index, and the reality is that it has become less important.

And it has two functions really. The first is that sterling has become less of a global reserve-ish type currency. It’s not the reserve currency as it used to be. Second, because it’s such a small part of global benchmarks, global fund managers don’t really have to have a view on the UK anymore in the way that they used to.

Having said all of that, there are still lots of things that are fantastic about the UK. All the things we know about, not least because of the rule of law and because of the reality that English is the most widespread spoken business language, that it is in a very attractive time zone between Asia and the US, and there’s lots of companies that are engaged in finance, and you have a network effect whereby people come here because people are here, and that continues to be the case. Brexit was obviously a bit of a blow to that, but I don’t think it’s necessarily a terminal blow.

And for that reason, there’s still lots of reasons to be optimistic about the UK. Even if you don’t think that the UK’s size within the global benchmark is likely to grow very much, there’s still reasons to be optimistic.

Victoria Scholar: I like that very happy note that we’re ending on, and it’s been a wonderful discussion and I’ve learned so much from both of you. So, thank you so, so much.

Our poll today, as I mentioned, was on how much of your portfolio is held in UK stocks. The winner with 44% is “up to 25%”. Do you think that’s about right?

Jasmine Yeo: Good news.

Victoria Scholar: So, a massive thank you to our panel, Jasmine Yeo and James Harries.

We would love to see you again for our next webinar coming soon. If you would like to watch any of the webinar back or share with your friends, then replay is, of course, available on YouTube.

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