So, my guest this week is Alex Crooke from Bankers Investment Trust. So we'll be talking to him in a bit, but obviously as usual, we've got some news to have a look at first. And fairly obviously, I'm going to be talking about the proposed merger of Hickle and Trigg, Foresight Solar, and also Murray Income.
So, we start with Hickle and Trigg first. This is the Hickle chart, and obviously not that pretty, and you can see the share price dipping off at the end there after the announcement of the deal, and quite a wide discount now. So about sort of going on for 31%.
And that is the Trigg chart. Also not pretty. And there is a small uplift at the end, but it's really not very big, and that's still on a 31.9% discount.
So the deal that they've announced is for Hickle to buy TRIG. But it's structured as a — it's the Guernsey equivalent of a section 10 scheme. Something we talk about all the time here. So basically you take the NAV of the two companies, you knock off the costs, and then you smash them together, and they're basing it on the NAV as at the 30th September. So we actually know what the ratio would be, which is there on the screen.
If you're a TRIG shareholder, you also get a cash exit option, but only for about 10.8% of the company. And there's no cash exit option if you're a Hickle shareholder. And we'll come on to why that is wrong later on. And that cash exit is going to be done at a 10% discount to the NAV. So very roughly 250 million quid at a 10% discount means there's 27.8 million of uplift to the NAV.
And that is split 50/50 between the Hickle and TRIG shareholders to help offset some of the costs of doing this. And the other sort of positive thing on this is that Sun Life would buy 100 million pounds worth of Hickle shares in the secondary market after the deal to try and help kind of steer the ship a bit. And they say that they've talked to large shareholders and had positive feedback from them, which a lot of people are finding quite surprising, but nobody's come out and denied it yet.
Obviously the manager stays on as the manager of my portfolio because Infrared run both funds. The fees are tiered as you might expect, and they're slightly lower. They're based on an average of market cap and NAV, which isn't ideal, but this seems to be the route that the renewables industry has gone down. Obviously if it's on a 30% discount, that makes a big difference. And so that works out, they reckon, about an expense ratio of about just under 1%.
And RES, which is the sort of other bit of the manager, will stay on as operations manager, and then it's got a tiered fee as well. And it's getting compensated as though that 250 million cash out hadn't happened. So for the first year, so its adjusted NAV is slightly higher than it would be otherwise. And they are both on three years' notice, which falls to two years' notice when we get to April 2030.
Now, what the smashed fund is going to be is slightly different. So they're going to target growth, and we'll look at that in a bit more detail in a second. And they're looking for a 10% total return on NAV, because obviously the TRIG yield is a lot higher than the Hickle one to kind of sweeten the whole pot. They're going to put the Hickle dividend up from 8.25p, where it's been flat for ages, to 9p. And they said it'd be covered about 1.1 times. And they also say that there's going to be a kind of progressive dividend policy. So you could see that dividend rise over time. So Hickle been flat for 8.25 for a long time, will go up to nine, could keep, could rise from here.
One of the classic things with mergers is the idea that some directors lose their jobs, but here that's not the case. So, you go to a board of 11 members, you know, everybody keeps their jobs. But they will reduce the number of directors over time. There's no timetable for that. There's no target number, nothing like that. And they are marching ahead with this. So, we should see a proper circular out soon. Meetings in December and aim to complete it within the first three months of 2026, if all goes to their plan.
Now I said that the strategy is shifting a bit. So really what they're trying to do is bring in more kind of growth into the mix by investing in things at an earlier stage. So actually developing projects and that sort of stuff, which means higher risk obviously, but higher potential returns, but lower cash yield up front. So there's kind of a shift from what they do normally now towards that kind of growth type thing, which is something actually that Octopus has been doing for a while. They've been trying to develop more projects and push returns on that way. I don't really have a massive problem with that.
But obviously you have to watch what the impact is on dividends, and it does represent a sort of change of the risk profile for investors. So especially if you're a Hickle shareholder where the risk looked relatively low, you are going to be taking on a bit more risk than you were.
And then there's also a reference to having more debt capacity, which kind of implies that they're thinking about using that. And again, some people will be a bit antsy about this. It's understandable. So, they've got about 500 million quid's worth of drawings on their revolving credit facility, which is floating rate, and they're going to try and replace that by doing private placements of debt. So, that will hopefully bring the cost of debt down, but at least it fixes it for the future. But what they sort of indicated here is that they could double the amount of debt that's in the combined portfolio. Which again, I think most people would be a bit worried about.
It becomes a sort of pan-infrastructure renewables fund, really quite complex in terms of what it's got. This is just smashing the two together. This is very roughly based on the fact sheets. I probably haven't got the maths exactly right, but this is the sort of thing we're looking at. So lots and lots of different segments of infrastructure and lots and lots of different countries, all kind of OECD and developed. So in terms of market risk, there's still a big bias towards wind. So you can see that's about 35% of the total. And if you're a Hickle shareholder and you weren't that keen on renewables, that's obviously going to be a bit of a worry.
And then a whole raft of other things. So you'd expect that if they're shifting more to growthy things, then the old-fashioned, if you like, PFI-type stuff will run down, I think. In terms of the new projects, there's a whole load of different things. And I didn't put that chart in here because it's just too complicated, but there's loads and loads of bits, different bits of infrastructure.
Now on the cost side of things, these things don't come cheap. They've given each other an indemnity if one of them backs out the deal for whatever reason. What I've heard is there's 30 million quid's worth of fees going to the advisers on this, and we're not talking about the normal brokers. And this is one of the things that I don't understand — not about normal brokers in the sector. This is Goldman Sachs and Rothschild people that sort of seem to dive into the sector only when there's a big ticket on offer and don't necessarily know what's going on otherwise, they don't necessarily know the investors. I just find it a bit strange that that happens quite a lot, but there we go. So big, it's not a cheap thing to do, slightly offset by this NAV uplift that you get from buying up the stock at a 10% discount.
The TRIG buyback program is going to be suspended because all the maths has been done based on the situation as it was when they announced it. But the vehicle buybacks will carry on going, but they're not coming up with anything to tackle those enormous discounts.
So there was a Q&A session at the end of the analyst panel which asked a lot of questions that I thought were quite relevant here. First one, and I think is a common one, is if Hickle wanted to do a deal where it wanted to grow and it's keen to buy things, there are lots of things that it can buy that are trading at a big discount to NAV. And if it was trying to maximize the uplift for its shareholders, if that was its only focus, you could probably pay a lot less than NAV for a book of assets. So why do this merger on an NAV-for-NAV basis? It doesn't really make sense from a Hickle shareholder point of view.
Secondly, given that you've got a completely different risk profile in the new vehicle going forward than you have at the moment, you're much more likely to be unhappy with the new portfolio if you're a Hickle shareholder than if you're a TRIG shareholder. So they rationalized the cash availability for TRIG on the grounds that there were a few people that hold TRIG that wouldn't like the new mandate. I think it's equally true, perhaps even more true, of Hickle. So it just seems wrong that there's no Hickle cash exit.
And the chairman also said, you know, the chairman's answer to this change of risk thing was just basically you can't please every shareholder, which I think is a bit weak.
Now the thing that we were banging on about last week was the change to the indexation of subsidies, which does take a chunk of money off the TRIG NAV, and they say that that was reflected in the terms of the deal even though it wasn't reflected in the 30th NAV, which is what they've used. So I'm not quite sure how that works. But that's what the board said. I think there ought to be another adjustment, but there we go.
And when people ask, you know, we're doing a big deal, normally you look for cost synergies. Are there cost synergies? No, the answer is straightforward, no. There aren't any cost synergies here. You get slightly reduced overall fees because of the tiered nature of things, but nevertheless there are no big cost synergies. There's nothing going to be taken out here. Whereas there would have been if Hickle had bought an infrastructure fund or if TRIG bought a renewables fund, which it would make more sense. You could have taken out, you know, a whole load of stuff.
The TRIG board said it was attracted to the deal because the earnings for the combined vehicle will be more resilient than the existing TRIG earnings. But there's an implication there for Hickle that it's going to be less resilient with TRIG involved. So that doesn't really stack up either.
And there's genuine questions. I think it's just too appalling to contemplate, but you know, we could get a government that comes in and scraps subsidies altogether. If that happens, then the value of TRIG that Hickle's acquiring would be an awful lot lower, and Hickle shareholders would have lost out big time beyond what they're going to sort of lose out on already. And there's no mechanism to compensate them for that.
And there's a general question, looked at already. Why can't they just do these deals, separate deals, and grow themselves? Why can't they go after growth opportunity if that's what boards want to do? And they're already big companies. They don't need to be bigger. You know that you can't really have a liquidity argument for doing it because these are all, you know, 1.72 billion market cap companies. It doesn't really make sense. So a lot of people are unhappy. I think it's understandable.
The people that sort of really jumped up and started chatting about it first were CG Asset Management because they are shareholders in Hickle and not in TRIG, although they did hold TRIG and they sold it in the summer before this happened. And it's been pointed out that one of the things that's achieved here is that TRIG was supposed to have a continuation vote next year and now won't have one. So it's got away with that. So it just all smells a bit.
I'm really not happy with the thing. I think there are very good reasons why Hickle investors should vote against this. If you're a TRIG investor, it's probably the best deal that you could possibly get. And that's the whole point. But the reason why it's so good for TRIG investors is because it's bad for Hickle investors, and you're really, you know, one is being compromised as opposed to the other. And it shouldn't be that way around given that Hickle's buying TRIG. So there we go.
Foresight Solar. So another disaster there, and you can see the share price going down more recently along with the NAV, really not great. Not a very big company now, only 362 market cap on a 35% discount, but a really big yield. Now what we want to talk about here is the latest quarterly announcements.
And it's not pretty at all as you can see there. So the dividends sort of match the time value. That's kind of what you expect. See, power price forecasts that have been chipped away at — they didn't come down again, which is good. So that's kind of helpful. There were some particular problems with some of the projects I'll talk about in a second. There's a big cut to the forecast value of renewable energy certificates, the sort of things that basically, if you're a fossil fuel power producer, you have to buy these things.
And apparently there will be — there is a sense that so much more renewable capacity is coming on, especially with the latest couple of auction rounds that the government's done to run the certificates, that there's going to be an awful lot more of these ROC certificates around, and that means that the price for them will go down, and that all makes sense. So that's going to be a thing that's probably going to be common to most people. Inflation is actually running a bit ahead of where they were thinking it was going to be. So that's been a positive thing. But there's some discount rate adjustments. So basically what those are is them cutting valuations of some things in the portfolio, and we'll come on to why in a minute. And then the other big one in here is this tax review adjustment. So 3.6p off the NAV.
So what was going on underneath all of that? So solar portfolio, they had very good radiation. So that should have been — they had a bumpy year in terms of generation, but there were a lot of outages where they lost their connection to the grid. That's not their fault. It's not something within their control. It's a national grid problem or the equivalent in other countries. But that's not great and that's just something that I think needs to be improved generally.
They've been trying to sell a portfolio of Australian assets and there just haven't been any buyers for the price they wanted to sell on that. So that's a bit worrying. So they have written down the value of those to reflect the fact that they're not sold for the price that they're looking for them for. And they're still wondering, they still want to cash those in. So they're looking at what ways that they could do that maybe. And then also there have been trades for Spanish solar too and they've been coming in at prices lower than had been hoped as well.
This tax thing, I don't really understand, and I talked to a few people and nobody seems to understand where it's come from. It's sort of something around just the assumptions that they were making were a bit optimistic and they had chats with HMRC and HMRC didn't like it, but whether it's just unique to them or not, we just don't know. But given that nobody else seems to know what's going on here, I would think it probably is unique to them because otherwise HMRC would have been talking to some of the other companies. We will see.
They said they quantified what the hit would be to this indexation consultation and it's really quite chunky. So in the worst case scenario where the government just pretended that it had been using CPI all the way through rather than RPI, it would be a 10% hit to the NAV. And for you who've watched back the shows before, like basically this is just a terrible idea and it would just basically raise the cost of private finance for everything that the government wants to do in the future and end up costing them more money than they save. I think it's just a really daft idea.
So with all of this going on, the chairman really sounded a note of disappointment. They are looking for a deal. I think that is likely to come probably next year. We will see what happens. But what price is for that, we will see. It did occur to me because there's a lot of stuff getting written down here whether they were sort of basically window dressing it a bit to say this is the real value that we think it is and come and pitch us, you know, for a price around that, but we'll see. In the meantime they're going to carry on buying that stock.
And then let's have a good news story for a change. Murray Income, which we know has been suffering for a long time, and it's because it had a quality focus. They've been quite good about buying stock and keeping the discount down, and then when they announced that they're going to do something, it just got narrowed a bit. And they've said that they're going to put Artemis in as the manager. So it's a straightforward swap of Aberdeen for Artemis.
The Artemis team, I quite like. It's kind of weird that given how good they are that they haven't had an investment trust to run before, but this will obviously solve that issue. And they've just had this pretty consistent good returns for a long time. There's basically no real change to the strategy of the fund, because it's the same sector, same benchmark, same dividend policy. They're going to carry on growing the dividend. They're going to carry on buying back stock. There's nothing really different there. And so because of that, there's no need to offer a vote for shareholders, and the board felt there was no need to offer a cash exit because they're going to be buying back stock anyway. And I think I agree with that. It's not something so radical and scary that people want to sell.
Although if you did want to persist with like a quality approach, what I've said and I really commented on the deal was that the best thing is just to switch into either Income & Growth, which is the same manager, quality style, or something like Growth & Income. And you can tell from the performance of both of those that these are qualities that have been suffering for a long time, and part of the argument might be returns, but we'll see.
Obviously it comes with a lower fee, which is good news, and based on the lower market cap and NAV, which is obviously good news, and they are going to waive the fees for nine months because that covers the cost of doing this deal, which are not that big anyway. And the notice period is only three months. The contrast between that and the notice period that Hickle and TRIG are prepared to hand out is just bonkers. But there we go. So tick, tick, tick.
I think the reason it works, or it seems to have worked so far, but it's got a long track record of working, is they're not pinned to hold themselves as value or growth or quality or momentum or anything like that. So they're trying to be sort of pragmatic about stuff. They're not just buying what's in the benchmark. They're not just buying the big income generators. Everything they're kind of looking at, they're forecasting out five years. They're looking at the cash flow generation. They're saying, can that cash flow sustain dividend growth? And if it can, it'll make it into the portfolio. And that all makes complete sense to me.
So that's the track record. There was a — they're going to do a shareholder presentation. I've seen an analyst one that's not up on the website. So I was — there's like a screen I was going to help to capture, but they did show a chart. So look out for it when they do the shareholder presentation. Basically just showing how many rolling periods they've outperformed in, and it's very, very rare that they've underperformed. Because it's not skewed to a particular style, there may be times when it's not top of the pile, but to be top quartile over most periods is actually quite good news. So I like this. I think it's a good result for Murray Income. It's just in a graph on there. So good luck to them, really.
So that's enough of me. There's loads and loads of comments come in here. Is Hickle a buy if the discount's so wide? I think Hickle's definitely a buy if they turn around and say we're not going to do the deal. Even despite this kind of break clause thing, it's not that big a deal in the great scheme of things. So that would be taken as a positive. And obviously, one of the things that I'm thinking of is that by doing this, if it was rejected, they basically put both of themselves in play. So it would just be interesting what happens.
Some conflicts of interest we can't see. We don't know. I'm not going to go into that. Just like trying to — yeah, probably not a good idea. Yeah, that's probably it. So we'll stop there. We'll hand over to Alex and you can tell us a much better story about Bankers Investment Trust.
Cool. Let me give you control of the slides and I'll let you drive the presentation. Can you tell us about the trust and then we'll go to some questions?
Okay. Thank you. Thank you, James. So let's — a couple of slides just on the trust and how we operate to set the scene, and for some of those listeners who maybe don't know so much about us. And then I'll touch on my outlook and how I'm seeing markets. I'm sure there'll be some questions on that, and then finish up with our positioning and how we're sort of currently structured. So let's talk about Bankers. I mean, core principles, we have two objectives. Most of us have a single one about a benchmark, and we're trying to outperform a benchmark of global equities, but we're also trying to grow the dividend above inflation. And so that's important, I think, for a lot of our investors who rely on the income and the growth in the income.
We've 58 years, fractionally behind City of London by about four months in terms of that long-term record, and ahead of the rest of the bunch. So, you know, 58 years of annual increases in the dividends. So a very powerful statement of why investment trusts are really good for income and income generation. We're focused on a sort of portfolio of about 100 stocks, but really split into four regions. So we're trying to cover the whole world. We can invest anywhere we want. We've got licenses in pretty much every market. And we've split the world geographically.
But we talk as a team about the stocks we own, and we can sort of overweight one in one region because it gives better value or better opportunities. But about a hundred names, we cut this right down. So some of you who may have seen me a year or two ago, we used to hold more. We had a big, deep review last year and decided to simplify, really, I think is the best way of thinking about it, to follow really where we had the greatest conviction, to try and put more of the capital into those investments, and so cut the tail quite dramatically in the portfolio.
And I think, you know, apart from sort of a tricky time around the election back in November '24 when Trump got in and global equities saw some rather extreme price moves in some stocks, which have sort of settled down this year, you know, we're roughly ahead of the benchmark just about year to date. And so I think it is beginning to work quite nicely, that increased focus.
I work for a company called Janus Henderson who have the management contract for this trust and have held it since the 1970s. So, you know, a long-term relationship there and very much, you know, what we believe in. We're a big firm listed in New York. A lot of analysts, sort of 200 plus investment people on the equities side alone. And we have local experts, really our analysts are based predominantly in the regions. So although the PMs, some of them — Junichi, my Japanese manager, is in Tokyo — you know, we really are drawing on local expertise in these markets. So the ability to get to meet companies and know their markets well, and that therefore gives us the flexibility to shift around a little bit between value and growth.
I think we've moved a little bit more value in international markets, continuing really generally with a growth tilt in the US, and that's been delivering reasonable returns. And then finally, low costs. The management fee, the all-in cost is sort of 0.51 there, with all charges in there. And the management fee is a tiered one. So as we grow, the fee should fall hopefully, and low-cost debt. So we refinanced all our debt through the last sort of seven or eight years, so our debt extends out to 2045. So another 20 years before the last one retires, but an overall cost of 2.7%. So we're not relying on very expensive short-term borrowing facilities.
The team itself, here it is. Myself, I've been managing this since 2003. So, you know, very much been enjoying managing this trust over those years. And then I've been joined recently by Richard Cole, who's a colleague I've worked with really quite closely for about seven or eight years. He's been with us for nearly 10 at Janus Henderson. And so I know him very well. He has a technology background, which I think is going to be really important for the next five or 10 years of investing in my mind.
I think particularly, you know, I'll talk about it later and we can talk about it in questions, but it's about the adoption of AI and how really the new technologies are going to filter through all companies that I think really is exciting about what Richard brings. So not just his expertise in the current big IT companies, but really how they're going to adopt technology throughout different industries. So, Greg, I'm really pleased he's come and joined me. A lot of expertise, a lot of experience, as you can see there, very fine fund manager. So the rest of us, you know, average of sort of 25 years of experience there. So again, very experienced investment team, but sitting on top of some sort of 70, 80 analysts that we have around the world who really are spending their entire days looking at stocks and trying to think about them deeply.
So as a team we work very closely, try not to overlap in too many stocks, but really try and make sure we're consistent talking about themes we see in markets and investment ideas and how they affect the different companies and the different regions we manage.
So let's move on to sort of talking a little bit more about how we see the world. And I think there've been a lot of challenges in markets, and I think reflecting a little bit on what's been going on. I think two things really have worried investors. But actually markets have climbed that worry and I've actually, you know, from a market point of view, sort of put it aside. The first one is obviously tariffs here. So on the right is the US effective tariff rates, and we can see that spike. You know, we remember Liberation Day with Trump with his board of 30, 40% on a lot of import goods. You know, we're not anywhere near that. Deals have been done sort of in the 10 to 15 to 20% range, and there's a lot of offsets, and we're hearing more, and we probably don't know all of them, and
There will be more to come, I think, of goods where they just recognize cocoa, coffee, all sorts of food stocks that aren't grown in America, but they enjoy consuming. So, I think there'll be lots of offsets and concessions. So, maybe this ends up at 15%. But it is manageable. The companies we're talking to are saying, 'Look, we take a bit of a pain, and the importer takes a bit of a pain, but generally this is manageable and isn't affecting sales materially.'
On the left are the inflation worries. So, these are the inflation rates. So I think, look, maybe at the green line, which is the sort of core goods, which is you expect some of that less foods and energy, it has risen a little bit, but it's manageable, it's sort of still under 2%. And the core levels, you know, again flicked up a little bit in the last few months, but they look again very manageable. Rents are falling, so I think we will... I've got a slide in a minute where we'll look at, you know, how interest rate cuts may be coming, but I think, you know, it isn't the big spike, it isn't the four or 5% with rates having to go up that everybody worried about. So I think we're transitioning through the worries about tariffs.
And then the other worries really have been about investment, sort of a bubble, you know, AI spending, and really whether it's a deeper question about the returns, but really whether this spending is too much. So this is an interesting graph looking at the line there rising, the single line is the cash flow, operating cash flow of these hyperscalers. So the big US companies that are basically investing the majority of the money into the AI and data center expansion, their cash flow has been inflecting upwards as they're very successful businesses, companies like Amazon sort of winding up the margins and the prices they're charging, and therefore the capex is going up. To Microsoft, you know, growing very strongly in cloud services. So basically they've been growing cash flow and therefore the capex, that sort of green box there, you know, it's been expanding very rapidly and continues to accelerate, but it's within the envelope in my mind of their cash flow. They're not cash flow negative yet. They're still buying back stock, as you can see the browner line there, and they're still paying dividends. So I think still manageable. It is accelerating.
So I think we're in a boom, not a bubble. And you know, bubbles are characterized by, you know, excessive leverage, excessive IPOs at ridiculous prices, and these sort of elements. Now, you know, until the AI boom becomes sort of heavily leveraged and debt funded, which I just, you know, it will do one day, but it isn't at the moment. So I think at the moment very manageable, you know, say managing it within their cash flow, and these businesses are very profitable, lower ratings actually than the peak. They're half the ratings that we had in the dotcom boom if you look at price to cash, sorry, price to EBIT multiples or traditional P multiples. So I think still a manageable phase of expansion and interesting opportunities.
If we look for next year, so look at it, but more, look, I'm reasonably positive about next year. I think this year has been challenging from a macro point of view. Companies we meet have said, look, we have slowed investment, we have slowed hiring because we just wanted to see how some of these issues transpire and move forward. And I think it'll settle down into '26 with the benefits of some quite big things in America. We've got tax giveaways from Trump's big beautiful budget, both to consumers and corporates will be saving tax, and then the tariff situation will move through as it does in sort of a one-off adjustment in price.
So you see here on the left chart the GDP growth expectations on the left of the line, which is historic to some extent, you know, lots of volatility there. So quarter on quarter choppy and very difficult for companies to be managing those variations in demand. As we look forward, these are the UBS forecasts, you begin to see it settling down a little bit, particularly with the US sort of matching European growth, but sort of half a percent per annum for a quarter. So 2% per annum is quite a nice stable background with one hopes some interest rate cuts as well.
On the right is looking again just at US earnings against European earnings, and it's been the key reason why, you know, US market has continued to outperform. Again, it's been a bit choppy in the last few years through COVID, but I think you can see on the far right that green line that the trailing earnings relative between the US and Europe is beginning to stretch upwards again. So, you know, one hopes German expansion, fiscal expansion comes through, but I still think the US is the place to be hunting for a lot of your stocks.
I mentioned firmly that I think we will see some rate cuts next year. So again, the left-hand chart is showing you how much the market is pricing in interest rate cuts. So roughly another two quarter-point cuts for the UK and three quarter-point cuts for the US. I think, you know, a bit tricky in December whether the Bank of England cuts it. It might do. I think the Fed will probably skip December and cut in January. But I think the pressure then rises on both central banks really to be cutting next year into, you know, some slightly better inflation numbers in my mind.
So I wouldn't be surprised if we get all the way down to a sort of a three in front of the interest rate, both here in Europe, UK and in America. So I think, you know, that's again, we build it bullish for equities and then the market. Finally, in sort of through aspects, the challenges often are, you know, look, isn't it a very expensive equity market? It is more expensive than historical, and you can see that the PE ratio there has been rising in the last few years as this AI investment spending is supporting the economy and growing earnings.
But I would look at the blue line, which is the margins, operating margins for US companies in the S&P 500. It is still rising. So margins are going up, companies are more profitable, and you therefore pay a higher price for that in my mind. You know, it justifies the higher price because they are better quality businesses and earning better returns on their invested capital, and I think this continues to go up. I think you'll find again, I say, some of the discounts in the offsetting taxes, investment spending, some of the tariff impacts will bring for US companies more manufacturing onshore and more volumes against some of their competitors. So again, more reasons I think next year to continue on the whole to sort of focus on some of these US names.
Not to the extent of all markets. I think there still, Japan is another area I favor and have favored for a while. It's done quite well. It's held up reasonably well through this year. Again, sorry for all the lots of lines. The one I wanted to focus on was on the left, which is Japanese compensation. So wage growth is the green line, has been rising and is roughly 4%.
Doesn't sound a huge lot, but when it's been a 20-year stagnation in the economy to get 4% increase in wages is important and is helping offset some of the inflation in that market. And but it is driving consumption. So you're also seeing the red line there going up, which is consumption in Japan. Again, that's all helping the stock market in my mind. So again, I think, you know, some quite interesting trends going on there.
So how are we positioned? I think one of our key themes has been predominantly financials and particularly banks. I think there's lots of reasons in here. So first of all, that they were very cheap. So on the left is just look at European banks PE relative. So the price relative to the market. If we go all the way back to the start of the GFC, the financial crisis, they were sort of roughly trading in line with the market. It's lost all of that premium, almost trading at half the market valuation as it was building capital, reforming, and really I think from that level, to my mind, we're at a position where capital is adequate now, it doesn't need to be rebuilt.
If anything, we may see some deregulation reduce capital requirements, which again would be supporting growth. So I think growth's picked up, interest rates have risen, which means returns on deposits are rising, the spread is rising for banks. So lots of positives in here. But on top of that, you know, again, we're seeing investment borrowings begin to improve a little bit. So loan growth is improving. And I think finally, I think this is a sector, financials in aggregate, is likely to be probably the early beneficiaries of AI adoption in terms of productivity and improvements in cost and margins.
So I think this is probably, if you said which sectors taking on AI quickest and adopting it, it is the financials, starting with the big banks who obviously have more capital and more investment to spend on AI. So as we look, that trickle down, that diffusion, I suppose, of the AI investment, you're building data centers to cope with handling data and improving how you use your data. I think the financials are going to be one of the sectors that'll see the benefits quicker. So another reason to own it.
So when you look at our exposures there, that financials is our largest overweight position, also provides very nice yield, which always helps. We are sort of broadly in line with it. So we're not hugely overweight. But within there, you know, the key holdings are probably Amazon and Microsoft are our largest overweight positions in the sort of Mag Seven names. But we have a decent exposure to semiconductors and some of those hyperscalers that are building out the networks of data centers. So again, that we like that.
We're quite underweight, I suppose, historically the consumer. I still think in Western markets there are pressures on consumers from price rises coming through. So again, an area we're sort of much more lower exposed than we have been historically. These figures are sort of September, as always. They have to present, get these presentations lined up. The October numbers are on the website, and they will show a little bit more investment into North America.
You know, the downturn we've seen in the past few weeks, we see as transitory. Markets don't go up forever. They do have pauses and pullbacks. And you know, looking at the underlying earnings and talking to companies through the third quarter results that we've just sort of finishing up with, I think is a very positive message coming through about investment spending and the picture for next year. So with that, I might pause actually and let James maybe take some questions.
There we are. I am back. Very good. Thank you very much, Alex. It's very interesting. It is very interesting because it's sort of running slightly counter to a lot of the headlines. I mean, I was looking at that because a few people have been saying, 'Oh, maybe you should start looking at consumer staples and you're actually quite underweight there.' So, so you're basically saying this pullback is temporary and it's not time to start running for the hills.
No, I just don't see, you know, the big bits about, right, we're in a bubble, we're in a bubble, you know, and it's going to crash imminently. And you know, I think some of the signs, the negatives, they say, well, look, there's a lot of cross-holdings. Everybody's investing in everybody else. That's a terrible sign, isn't it? I, you know, I think when you think about it, you know, if you were Nvidia with, you know, sales of 50 billion odd a quarter, you know, and the amount of cash they've got, wouldn't you, you know, help your, you know, the supplier base, you know, to continue to grow this out? Because if everybody does get, if AI is the next sort of industrial revolution, then you want as much of this stuff to feed through, and they're not throwing it away because they'll sell these chips to somebody else. They're in huge shortfall.
So they'll take the chips back if there is some corporate failure. But I still don't see it as a position. That chart I think is very powerful. The one that, you know, when you look at Microsoft and Amazon and Meta and all the big boys that are spending, they're doing it within their cash flow. They are not. There's another graph I've got if I just jump through, which is quite an interesting one, which is this one, which is, you know, basically capex of the technology sector against sales and then free cash flow.
Now I think sales is a slight misnomer. You know, it depends on your margin. You can sell things for 90 cents to everybody, but in the pound, 90 cents in the dollar. But the blue line is the key one. You know, the capex to your free cash flow is running at about 40%. It's on the right-hand side. It was 70, 80, you know, odd percent at the boom of the dotcom era, and so we're not there yet. And I think, you know, I do think the market is still going to see some very strong numbers come out of a lot of these names in the next year.
And the consumer side, it is, we are buying some actually. I mean, I've started a holding in Diageo. I am, you know, I think there's a few companies that are really hitting very low multiples, but I think it's early days to start nibbling rather than, you know, getting yourself materially overweight in some of those consumer stocks.
That's fascinating. I mean, I suppose part of the reason why people have been nervous about AI is this end-use case thing. Are you using it at all yet in managing the money? Is it helping you doing research or anything? Is anything going on at Henderson?
Yeah, I think yes, there is. So I think it's about the productivity. How can we improve things? So a lot of the jobs that I do that take me away from looking at stocks, writing reports, writing updates for people, you know, a lot of that is beginning to do. So we have systems that do all the attribution analysis. It just chunks it through. It knows what I own. It knows what I've bought and sold, and it goes, 'Right, here's your performance data.' And I've just got that now at my fingertips.
It chunks through corporate earnings figures. We, again, through Bloomberg and other systems, we can quiz it with questions and save time with the inventory story here, and it just chunks it out. So I don't have to spend hours getting to page 52 of a report. So I think productivity gains, I'm spending more time, materially more time looking at stocks than I was doing non-investment activities.
And then for the business, you know, again, we're hearing lots of great examples of how it is reducing time and allowing people to do actually productive tasks, whether it's filling out requests for information for clients or presentation writing and things like this. So it's not, there's no killer app yet, but I just think we're in the early days of how, you know, freeing up people to actually focus on productive aspects of their jobs to grow their businesses is going to be the next phase.
Within the financials, you talked about banks, and would, are you worried that there's any kind of pressure on interest rate margins as interest rates come down, or are we not there yet?
So I think what you need to know is a lot of banks hedge this exposure. So they will, and they hedge it much longer than you think, so three or four years. And so what they would, so that leaks into your net interest margin or leaks out. And so in that respect, if you talk to particularly UK banks, they would say we've got still two years of reasonably good peak net interest margins before, you know, the rate cuts that we've just started to see begin to ease into those numbers.
So I think you've got years before you'll really worry about, you know, if rates do go down as far as sort of a two in front of them, but they're not. I think they're going to slip down to, you know, maybe low fours or a three because I think inflation is bubbling away everywhere. It's a genie. It's out of the bottle, as it were. It's going to be very hard to get that under control. So I think it's in my forecast, it's in our numbers, our modeling, is a slight degradation in the net interest margin.
But on top of that is really if you can get some deregulation, yeah, some sensible deregulation. And I'm not talking about going back to the wild days of massively leveraging balance sheets, but, you know, there's a lot of, you know, some aspects I think of that could be solved in there and focusing on lending. Again, you know, lending growth is very low at the moment. That should be in the sort of, I think it should be double GDP. So we're talking sort of nominal GDP, it should be about six or 7% in the current market, and it's basically two.
So if that picks up on top of all the other things, you should see dividends as well continue to grow. So the dividends and buybacks is roughly sort of 10% of market cap at the moment annualized. It's pretty impressive. So you're chunking away with that with underlying earnings growth. It's not difficult to get a 15% sort of total return story, if not 20%, in these names.
And then outside of the banks, are you buying asset managers, insurance companies, that sort of anything else like that within financials?
Yeah, we still really like the card processing names. So AMX is probably our biggest holding in that space. So we like that from a sort of also a travel point of view, but they seem to be winning a very nice game of accumulating new clients. It's an aspirational brand for a lot of people, and therefore they're growing their client base much quicker than their competitors. So we quite like the card processors. Again, you know, the world is going ever more non-cash, so again, it suits them and the systems where they transact over. So probably that's the next biggest bit.
And then after that, insurers, it's more tricky. We do own them and we're starting to take some profits. I think, you know, push price, they've had a challenging time because a lot of the costs of, you know, whether it's repairing cars or all sorts of things have been quite challenging and they push price up. But I think, you know, you're beginning to sort of, I think, sense where those margins are likely. The difference between, you know, obviously what they charge and what they have to do to repair things is beginning to crunch a little bit. So I think a little bit more worried about that area, so profit taking rather than net investing.
And second with sectors, what's the view on healthcare at the moment?
