Hello and welcome to The Download. I'm your host, Dave Richardson. And it is David and David time. We've got David Lambert, head of European Equities at RBC Global Asset Management UK. Actually, your title is even fancier than that, isn't it?

I don't know. It gets a bit long. Yeah, it's got lots of added bits. I just go by David.

So big European wheel, David Lambert. How's your new year off? Is it off to a good start?

It's always nice. You come back after the break and whether you have a little bit of time off or a lot of time off. Even though it's a new year and it shouldn't make any difference with the calendar changing, you feel refreshed and there's lots of new information. You relook all the portfolios. Not that you're not doing that all the time. But it's like, right, there's a chance. You get things right, you get things wrong, you address these things, you look at what's gone right and why it's gone right and why it's gone wrong. And so it's always a good time in January. Everyone's refreshed up for doing those things. So I always find it really interesting, before we get into the earning season, which starts in a couple of weeks’ time, to really do a spring clean and clear your thoughts. Sometimes, get rid of things in the portfolio that just haven't been working for you or not the way you want. It just feels it's a weight off the shoulder sometimes because you're always doing these things. And New Year is always a good time to just take a fresh pair of eyes and look at everything.

Before we dig into the investment stuff, you got a young family, so Christmas just must be incredible right now in your house?

Yeah. I mean, this is it. My eldest is four, my youngest, she's two and a half. So yeah, Christmas is everything right now. They're still singing the Christmas songs, and they won't come out their heads for ages. But now it's onto the Easter Bunny straight away. The conversation over the dinner table last night was the Easter Bunny and the Tooth fairy, even though they've clearly got all their teeth still, and that is a few years away. So, yeah, this is like the ongoing wheel of fairytale characters.

Wow. That's just amazing. I miss those days. So as you were saying, you refreshed, give you some time, like you say, every year at this time to think about the previous year and maybe some things you wanted to clean up and then head into 2025. And that's what this series is all about. We've got about 15 different portfolio managers on that are going to do a look back at 2024 and a look forward to 2025, although we've gotten off on all kinds of different tangents. I'm sure we will as well with you. And if you want to get that look back and that preview from all these different investment managers, please click subscribe. This one's on YouTube because we had Habib just before, and now we've got David looking pretty sharp. We'll get an evaluation from our producer. He's been scoring people for their appearance. I got an F, so I'm sure you're doing better. Click subscribe if you're listening on the podcast, subscribe, follow wherever you listen to podcast, give us a review. We'd love to have that. The marketing folks like it when we've got lots of followers and subscribers and such. But David, 2024, a pretty good year. You're pretty happy with it. Now, I think the last time we were talking to you, you had a bit of an expectation that some of the winners that you had were showing some signs of a little bit of strain towards the end of the year. So when you look back at 2024, how do you assess the year, particularly that tail-end, when you're reassessing things, how did that go? And how are you set up going into 2025?

For Europe, 2024 was almost like a year of two halves. With the first four to five months, we saw the markets relatively strong. Then post May time, we've just been in a sideways band. It was up and then sideways, very choppy. The market couldn't really find any direction. With respect to Europe, people would always talk about things like the political uncertainty, which is more elections, things happening in France and Germany as well, later on in the year. Then obviously, with Trump coming in in the elections, there was always this unknown of what's going to happen with the tariffs, how would it impact Europe. But on the whole, the year was fairly positive. But I did suggest last time we spoke that one of the things that made me a little bit nervous were some valuations. Over the past number of years—and this includes Europe, it hasn't been as strong as the US, but it's still been relatively robust—but the market itself has outpaced earnings growth. As a consequence, we had seen re-rating. As portfolio managers, we're always thinking about great companies, but we're also thinking about the appropriate valuations for these. Now, you can see valuations get stretched and that may stay stretched for a long period of time, but it makes us more nervous. Some of the things we were doing in the back half of the year, we saw some of these names that we've held for a long time in the portfolio, we were just taking a little bit off the table. So top slicing, we're not getting rid of these names, but names that I suspect we'll still hold for the next 5, 10 years. You've got to be pragmatic and you've got to say, well, look, they've run far. There's probably more risk baiting now. Things could go wrong. We've seen that with some of our names over the back end of the year. The stocks come off. But ultimately, if you can do that and you can sell these stocks a little bit more expensive and they come back, then it gives you more powder to reinvest back into these and move the portfolios around. We're always looking to manage the risk. We look at the risks of the portfolio holistically, so we can look at our valuation exposure at a portfolio level, not just at a stock level. We can see if the portfolio is drifting into more highly valued companies on a whole. We look to address that. That's a constant daily look at the risk profile, and we address that constantly. We did some of that over the course of the back end of the year, rotate, take off the top of some of these expensive names and reinvest in some of the cheaper names. But we weren't really moving the portfolio a lot. We've kept it fairly balanced over the whole period of the second half of 2024, because we could see these things with respect to the political uncertainty, obviously the geopolitical uncertainty, and then obviously with Trump and his tariffs, etc. We could see these things on the horizon, as a consequence, we didn't really want to tilt the portfolio aggressively. Now, as we come into 2025, things are fairly similar, but we're in a position where you think of things like, we're at elevated political uncertainty, but is it going to get any more uncertain from here? I doubt it. When we think of things like China stimulus, we've started to see the China stimulus coming through second half of the year. These things always take time to grab, and China is a very important partner for Europe as a whole. I look at certain things and I think, well, actually, maybe the back end of 2024, early 2025 is not as bad as it gets. I wouldn't say it's bad, but I think we can see sequential improvement from here in certain things that worry people in the market. That makes me a little bit more confident and makes me think that I want to be a bit more cyclical in the portfolio, potentially. When we think of things like PMIs, in the US, they're fairly steady and above 50. But if we look at Europe as a whole, they've been pretty subdued. Now, these are oscillating metrics. As a consequence, when they're subdued, it's a good time to be looking at these because they will improve at some point. That's really interesting from a European perspective. When we see those things improve, then that's a forward indicator for things like earnings growth, GDP growth, earnings revisions, which are all positive for the market. I think around the edges, there are reasons to be more optimistic just because I think things are going to improve. Then even if we address Donald Trump and the potential for tariffs, we still don't know what's going to happen. But if we look at Europe and the things that would be ultimately exposed to tariffs, it's a very small proportion of European revenues. Really, what we'll be looking at is things made in Europe, shipped to the US. What we find for a lot of European businesses is that a lot of the revenue coming from the US is stuff made in the US and sold in the US, so it wouldn't be subjected to tariffs. You're looking at low single digits of revenues that would be exposed to things like tariffs. We shouldn't be as worried. Now, again, sequentially, I can see how the narrative gets no worse but improves, and as a consequence, should give us a firm backdrop for European equities. Then obviously, we couple that with the starting valuation, which is always fairly low for Europe, but on a spread basis to the US is a record high. We're looking at the UK, Spain, Italy, all trading at sub-11 times earnings. That's super cheap, even versus their own median over the last 20 years. We look at cheap valuations and incremental positives on the narrative as we move forward. We see earnings growth. Consensus has it around 8, 9, 10% coming this year on cheap valuations. Any rerating at a market level could lead to interesting total shareholder returns over the course of 2025. We remain constructive, although we're attentive to the risks, the unknown risks of tariffs and China, etc., that we've talked about. But that's how we're seeing the set up right now.

Wow, that's really interesting. I laugh about my weight. After gorging myself on food and drink over the holiday season, this is about as heavy and unhealthy as I get at any point in a given year. But I can't continue to live at those extreme levels. So even if I just go back to normal, which is not even living particularly healthily, I'm going to lose a little bit of weight and get a little bit healthier. It's this whole idea, which is interesting because Stu talked about this, which I'll share more in a minute, that things are not going to get any worse than they are or more uncertain than they are. If it's not going to get worse, it means it can only get better. Now, it doesn't mean it's going to be perfect, and it doesn't mean that there's no uncertainty out there, but you're at the peak. From a Canadian perspective, what we talked about with Stu a lot is the same thing. You get the politics, you get the economy, and of course, we've got the US right next to us. You've probably been watching in the papers over there, we're getting a lot of it from tariffs or annexation, whatever might be being discussed at any given day. But you add it all up and you go, it's almost like a blowout. That's about as bad as it gets. And then from here, things stabilize and normalize. So there's an argument to say that if things are going to get better, then I'm investing. That means the narrative there might get better as well.

Yeah, exactly, Dave. It's interesting because you can take this down to almost like a stock level as well, because when we think about things like earnings revisions, you think about how things turn and not getting any worse is almost on the second derivative getting better. So we can tell that second derivative that bottoming out. But what people try to look for maybe on the macro, but also on the micro, is they say, well, I've got to wait till those earnings are going positive. That actually isn't the case. The best time to buy stocks is when things start to get less worse, and you can see on a relative basis, they're not as bad as they were the month before, and the sequential improvements coming through. They haven't gone positive yet, but they're getting less negative. That's when you see stocks and markets start to perform. You got to be ahead of these things, and you can't wait for the numbers to show you positive. This is why this set up, I think, is really quite interesting. But I've been talking about Europe as a whole there, but we have got some really interesting parts of Europe that are actually performing really, really well. We looked towards Southern Europe. If we roll back to the financial crisis, this was the area of the PIGS, if you remember, you didn't want to touch those areas of the market. What we've seen is on the financials and the banking side of things, but just the economies themselves. These countries have sorted themselves out. They're now posting some of the fastest GDP growth we're seeing globally. PMIs, which we've talked about on the European level, have gone over 50. It looks positive. The markets themselves have been positive as well. We're looking at some really interesting parts of Europe, in Portugal, Italy, Spain, Greece, which is now still emerging markets, but may come back to develop markets. These are performing really well. There's some actual spots. All the headlines focus on what's going on with France and the right wing there and what's going on in Germany and the new elections coming up in the coming month and the instability there or the stagnation of the economies. But actually, there's some really interesting bits, too. As portfolio managers, we've got the luxury of being able to look and tilt our portfolios into parts of the market or companies that are exposed to parts of the market that are doing much better and improving. And the reason I just wanted to highlight that is because commentators, when they talk about Europe, they talk about it on the whole and they will tend to focus on Germany or France. But there's bits that are going really, really well. Again, that's a really interesting aspect for Europe going into 2025 and an area both in Spain and Italy where we're looking to and have been increasing our exposures.

Yeah, exactly. We had a similar conversation with Phil Langham around emerging markets, a similar conversation with Habib around global markets. He can go anywhere in the world, his team. We had Sarah and Irene on North American Equities in Canada versus the US. But again, you can go anywhere and in any sector, and you can certainly do the same thing in Europe. To think of Europe or emerging markets or North America as big blocks where everything just moves in concert with each other is just not the way it happens. I think everyone gets that, but you're able to parse out where the opportunities are and forget about even geography. It's company by company, because there are areas of the economy and sectors that are positioned to do particularly well and have been doing well and others that are quite stagged, and you're not expecting any recovery anytime soon there. Well, I guess this is why you love what you do, because it just creates opportunities for you everywhere.

Exactly. That's right. I think that's the crux of it, Dave. When we have these conversations with people, be it either side of the Atlantic, people always conflate the economy with the market, and they're not. They're not the same thing. They don't move in the same direction. You've seen Germany hit all times high this year, being very, very robust. It's not because of the domestic economy; it's because of those companies involved. Then people are also then confused, well, you're exposed to European equities, you're exposed to what's labeled the index, which is the group of investable universe, effectively. But you're not restricted to that. We don't have to go into areas that are loss-making or zero growth or have huge margin attrition going on around the edges. We can pivot away from that and just focus on those businesses that we know can compound, which we've talked about many, many times together. And that's it. And so, economy is not the market. And then within the market itself, we can go into those best places. That's what we've been doing for the past 20 or 25 years.

You mentioned Southern Europe as something that, again, started showing signs of getting less worse, and that's when you started to tilt that way and now showing some real promise. When you go sector by sector, where are you seeing that happening, or is something different happening when you look at it on a sector-by-sector basis?

As I say, we've remained fairly neutral, but my proclivity is to hopefully put more cyclicality on. We've seen some of the short cycle industrials, so those that are real fast twitched, react to the economy more, start to pick up quite nicely at the back end of the year. Now, one can never be sure whether that front running from Trump coming in and tariffs. There's been some movement in some of the short cycle stuff because they're fearful of what will happen post the inauguration next week. But we've seen some pickup there. The other area which I continue to see, and I've talked about this a number of times, which we still really, really like, is the financial sector and the banking sector within Europe. It has been historically, post-2008, the dog of Europe. I even saw today on my screen, the stocks financials in the 600 has hit 10-year relatively high as a gain today. We're seeing the banks improve. This is a function of tight regulation, getting the house in order over a number of years. We've seen some loan growth coming through as well, and actually the rate environment is helping. Even right now, the market has got—you could say pessimistic or optimistic—to be confident on rates coming down very aggressively. Obviously, we're seeing 10-year yields in the US and the UK in particular stay relatively high. Rates aren't coming down as quickly as people thought. This is good for the banks. Their net interest income line will prove much more robust. We're not seeing any downgrade. In fact, we're seeing this in upgrades again from the banks on a sector that's on still historic low levels. I told you about 10, 11 times for Spain, Italy, and the UK at a market level. We still look at the banks on a price earnings basis. We're looking at 6 or 7 times. These are really cheap assets with decent dividend yields, share buybacks coming through, good balance sheet, and I think earnings upgrades to come through because people have got too carried away on the number of rate cuts we're going to see. So financials we're still seeing to be fairly robust. The one area I still struggle with, when we think about cyclicality, is the consumer. We're still very balanced, maybe slightly underweight consumer discretionary and consumer staples. Part of the reason for that is our exposure in what we quite like in discretionary land which would be luxury goods. That's what Europe is good at. We've got some fantastic businesses. Now, obviously, luxury goods are quite dependent on China as well as the US. What would be going on with China? We've seen some softness. If you looked at these on a headline level, you’d say for a business to perform like this, some growth in China or globally in the market we've been stuck in is actually pretty good, but expectations were much higher. We've been loathing to get too aggressive in pushing back in the luxury goods, although we start to see them outperform again, hitting three-month relative highs in some areas. Just as I talk about China, again, long, slow rebound. It might be bumpy, but do we expect it can it get worse? No, not necessarily. We might be able to get more constructive in consumer discretionary. Consumer staples is an area which is obviously a bit more defensive. But we've seen some big brands, and we've seen beverages, particularly struggle all over the world. We still like the brand story, and we still like aspects of things like beverages, beer, and spirits, etc. But there's been this overarching concern—and it's all interlinked because we could go back to Novo Nordisk—of GLP-1s and the future consumption of certain foods and drinks going forward. It's all interlinked because obviously, Novo Nordisk, as you know, is a big part of what we've been doing for the last 15, 20 years. We're a little bit more cautious there. We're not really expecting the cyclical upturn, necessarily in the consumer, but we're seeing signs in other areas. I'd say financials are more cyclical and industrials are more cyclical. We're seeing some interesting areas.

Something that occurred to me that I just thought I'd throw in here just as an aside, because I know we've talked quite a bit in your appearances about the luxury goods—and actually we've bumped into each other on Bond Street and all the stores there. So China and the emergence of China has just been an incredible market for these brands over the last 20 years. And we're starting to see some other economies start to grow very rapidly and achieve certain levels of wealth and pockets of wealth within those economies where China might have been 15, 20 years ago. So India or Vietnam or some of the Middle Eastern countries, are those markets showing the same signs and interest in those luxury goods and those particular European luxury brands that we saw coming out of China in the '90s and early 2000s?

They are, but there is a difference because I think culturally—this is the beauty of it, particularly when you talk to Phil in the emerging markets—the Chinese are obviously very culturally different to the Indian population, for instance. Wealth and prosperity within China and showing it off is a much bigger part of the culture than it would be in India, which wouldn't necessarily be, at the moment, something that would be ingrained within that culture. But however, when we speak to the luxury goods companies themselves, they recognize clearly the growing wealth within a place like Vietnam and India, and that's exactly where they're moving. They're moving their advertising, they're building out infrastructure in these places. So they do see that coming. And ultimately, luxury is a very interesting aspect in terms that it can grow itself by making itself rare, and as a consequence, the desire for it grows. They'll quite easily be able to grow a business because you don't need that many customers, higher net worth customers, to start growing a decent business in India. We speak to LVMH, and they're already moving there. There isn't a big market there at the moment, but they're well on the front foot and have been making moves into these markets for some considerable time, and they need to, and this is what these companies should be doing. They should be forward-looking as opposed to what's been going on historically. China is still a big market, but absolutely, India, the most populous in the world now, will be a huge market at some point. But I don't think that initial growth like we saw in China will be quite the same yet just because of the cultural differences.

But as we've talked about, and what is fascinating and what so many people miss, which I keep coming back to, because when you first brought it up and we started talking about it, I hadn't made the connection. You have an incredible new technology and the innovation and creativity around a new technology. You can relate that to the innovation and the creativity and the technological advancement of being able to charge 20,000$ for a handbag and how you set that up within your business so that that demand is always there, that you manage it to the supply, you're changing things enough to maintain or you reach a certain status with the brand to maintain that pricing and margin. You would have to think that these companies, just like great technology companies, can innovate, and they will find a way to get what they need to out of these other emerging economies, right?

Absolutely. One of the best company examples to articulate what you just said is Ferrari. If you think how many vehicles Ferrari have to make, they don't make that many, but that order book is completely sold out for years in advance. They know exactly how to price. They know exactly how to keep those customers coming. It's amazing. It's a very straightforward story, to be perfectly honest, but people keep paying those prices, and that order book keeps building out multi-years in advance.

Yeah, I'm going to be scooping mine up in April. You get yours this summer, if I recall our conversation.

I wish.

That's April in the summer of 2110 or something, a hundred years from now. But we're not on the Ferrari list. We would like to be, though. But yeah, that innovation is incredible. Now, the other thing you did bring up Novo Nordisk, and I think over the last 24 hours, there was a report out that Eli Lilly has got a pill form of one of the GLPs. And I think when I was in London one time, you were talking about that this is one of those next evolutions of it. These stocks have been under quite a bit of pressure lately. Is this starting that next wave of interest where you see the expansion in the usage? Or just forget about it, we're still so early in everything that it just has multiple, multiple legs to go?

We're still early. I mean, this is still a big beast. I mean, the share prices of Lilly and Novo get thrown about quite a lot because obviously there's a lot of expectations there and people worry about the competition. Ultimately, the whole story about these two companies right now is supply. There's not enough supply. There's so much demand. The only people that are able to build supply are Eli Lilly and Novo Nordisk. So these guys have got the injectables market sort up. Now, ultimately, yes, you're right, on the oral side, that will be the next thing. Actually, Eli Lilly is ahead of Novo. Novo doesn't really have a great oral product. But the thing with orals is that the efficacy is always going to be a lot lower than injectables. If you can move people to more long-acting injectables with much higher efficacy, so the most recent readouts we've been seeing for Eli Lilly and Novo's Cagrisema, which we got data from December, you're looking at 20 to 25% weight loss. You're not going to achieve that with an oral, not yet anyway. I mean, these guys are ahead of the game. They know where to keep investing. But to be perfectly honest, at the moment, the only game in town is still the injectable, and it's trying to satisfy that huge demand. I've shown you numbers in presentations before about what little part of the population is actually served, just in the US as well, with respect to obesity, and the numbers that generates in terms of revenue for Eli Lilly, and Novo Nordisk. I think it's something we're always looking at. But at the moment, news on things like new products that probably only come to market potentially in six, seven years, they will move the share prices quite a lot when in fact, they shouldn't really be. There's quite a lot of nervousness in these names. But again, both Lilly and Novo come off. They were very strong through to the middle of the year, have been a lot weaker at the back end of the year, but net over 2024 were either flat or up, so not bad. But for instance, Novo, we saw a very week December, given some of the data readout, which actually we didn't think was that bad. But that's what you've got to live with in some of these stocks, particularly pharmaceuticals and drug companies. We've just got to carry on doing the work, be comfortable that their platform continues to deliver good return on investment, and they can keep investing in the supply side, and as a consequence, build those moats, which these guys are doing particularly well. Again, we've seen weakness in a stock that we like, but we see that as a great setup for a long term for a company that's going to grow its earnings well over double digit. Not triple digit, but well over 10, 15, 20% for the foreseeable future. Now, valuation is well below 20 times earnings. I mean, I think as an asset, it's a no-brainer, but you have to accept some volatility around news flow.

Yeah. So let's just finish off with a thought—and this is likely a fairly simple answer—around anything going on in Europe that you think is going to be particularly exciting in 2025? Or is it similar that we're going to be watching a lot of companies integrating artificial intelligence into their businesses to drive more productivity and growth? Or is there an area that you're seeing in Europe that you think is particularly interesting? Or in the UK, for that matter? We don't want to forget our friends in the UK.

Well, we still class ourselves as European, even though Brexit. You make a valid point with respect to AI and productivity gains. I think this is just an ongoing thing. I think this is for all corporates and even for us at GAM. I'm using the AI products that we're given on a daily basis to see if it can help us. It is helping me on a daily basis as well. Maybe next time you're interviewing me, I'll get the AI machine to answer the questions.

You seem somewhat smarter than normal, Dave. I will give you that today.

But with respect to Europe in particular, two aspects that Europe is pretty differentiated, other than luxury. I think with respect to the adoption of renewables and the transition, electrification and energy transition, I think we're probably further ahead and will be further ahead than most of the world. That means things like infrastructure spend, things like that. So some utilities become more interesting. You think of power cables to connect offshore wind turbines onto the mainland, things like that. I think there's certainly a big growth angle that Europe still dominates, and I think Europe would even be more the focus of the growth there because in the US, I think Trump is going to shun areas like that. I think that's interesting. Europe has always been very good at industrial optimization, and I think that continues. There are areas within industrials where Europe stands out. Then the other thing with respect to Europe is— and it's interesting, and this is more of a macro call as what happens in Germany, given the German elections—when you look at the balance sheet of Europe as a whole, we look at the economy, Europe's actually got a lot more wiggle room than the US, than areas in Asia, just because the Germans have been so prudent. If they release that debt break as such in Germany, we could see a whole lot of spending coming through out of Germany, just becoming a little bit less prudent and spending more. That could be an aspect or a theme that could help some of the European revenue exposure within our market.

Well, I'm glad I asked the question. That was super interesting. I think that is another one, again, where you look at that height, where we went at the start, of geopolitical uncertainty. But you start to dig down and you go, well, where are we ahead of the world right now in a lot of cases? Again, this transitional energy and the green transition, green technology, and who would be your main competitors? Well, China. You talk about that's ramping up, but it's still taking a bit to take off, and the US may be moving away from that. So again, these opportunities are created, and what's always interesting about talking to investment managers is you've got your finger on the pulse of so many things that when I ask a question like that, you always come up with something, and it just does make perfect sense that this is an area of strength. And again, in a growing world where the economy is growing and where there's money around, those luxury goods. It's a couple of interesting tidbits for investors listening, which you'll always get when we have David Lambert on.

It's always interesting. It's always something new to learn. And let's just hope 2025 treats us kindly and all the stocks in the portfolio go up, which obviously won't happen.

It just gets even better with the supercharged David Artificial Intelligence Lambert that we've had on this podcast. I'll just finish up. How's the football season going for you and the squad?

It's going okay. It's not great. You come into each season with these hopes. My football team always flatters to deceive. Yeah, it's mid-table mediocrity. We've got a cup game tonight. Maybe that will improve things. But it's been good. It's been fine. Just the general football, I watch it all over the place. It's great to watch. The standard of football in the UK is the best football in the world, actually, the Premier League, although my team is three tiers below that. I just dream of my team being there.

That's great. I know you enjoy your football, and hopefully, when I'm there in a couple of weeks, we'll get to enjoy some of the other things that we both enjoy. David, thanks for joining us today.

Look forward to it, Dave. Thanks ever so much.