Hugh Selby-Smith

Savers could bear the hidden cost of the developed world’s mounting debt burden as governments run out of easy ways to combat their leveraged balance sheets, Hugh Selby-Smith, co-Chief Investment Officer at Talaria Capital says.

Selby-Smith says the global economy is moving from a three-decade era shaped by globalisation, cheap capital and low interest rates, into a new era of political fragmentation and higher funding costs.

“The headlines are full of missiles, airstrikes and oil shocks, but the more important change for investors is happening in plain sight,” Selby-Smith says.

“Supported by falling interest rates, governments have accumulated substantial debt across developed economies to the point where further borrowing is limited and there is little political appetite to cut spending sharply or raise taxes significantly. That leaves one option which is rarely discussed openly, and that is to let inflation do some of the work.”

Selby-Smith says this is what investors call financial repression – when interest rates stay below inflation for long enough that cash and savings lose value in real terms, while the real value of government debt falls over time.

“If inflation stays above interest rates for a prolonged period, people holding cash lose spending power, while borrowers, including governments, benefit because their debt becomes easier to manage,” Selby-Smith says.

“In effect, what is happening is wealth is transferred from those who save to those who owe, with governments the major beneficiaries.”

Talaria says years of globalisation has delivered reduced levels of global poverty, lower prices for consumers and more efficient supply chains, but has contributed to wealth inequality, trade imbalances and public debt. At the same time, governments are focusing more on economic self-reliance and security.

Selby-Smith says in an environment where the gap between real and nominal growth is higher the market is likely to place greater value on businesses that are generating significant levels of free cashflow, where funding is tighter investors ought to place a higher value on getting paid back their investment faster.

Talaria continues to favour short duration, real assets, strong balance sheets and diversification. Over the nine months to March 31, real assets including gold, commodities and infrastructure have performed strongly, while short-duration bonds have outperformed long-duration bonds.

“Investors who expect the next ten years to mirror the previous decade risk being caught off guard. What worked in a world of abundant capital may not work in a world defined by competition for capital,” Selby-Smith says.

“The system is changing and so must investors. Those who recognise this early and prioritise resilience and value over speculative growth stories that we’ve become accustomed are likely to be better placed in the years ahead.”

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Hugh Selby-Smith

From how AI is already shaping businesses and markets via data centres and drug trials, to precious metals, defence spending and demographics around the world, Talaria Co-CIO Hugh Selby-Smith outlines how the 10 stats below are impacting our society and why they matter for the future.

1.

3.

Microsoft down ~2.0% past 12 months to Feb 16, despite the S&P500 (of which it is a significant part) being up ~12%. Even the best companies with track records of good ROI from capex spend are subject to market concerns.

4.

AI-designed drugs are whizzing through the preclinical phase (before human trials begin) in only 12-18 months, compared with three to five years previously. A study published in 2024, of their performance in such trials, found an 80-90% success rate. This compares with historical averages of 40-65%. That, in turn, boosts the overall rate of getting drugs successfully through the entire pipeline to 9-18%, up from 5-10%. The average cost of developing a successful new drug is $2.8bn, so AI has the potential to cut that cost in half.
The Economist  

5.

Above-ground silver inventories stood at about 19 bln oz in 2024. Bullion inventories (bars and coins) total roughly 7.4 blnoz, including 1.4 bln oz held in London vaults and Comex warehouses—equivalent to annual silver demand of 1–1.2 bln oz. By comparison, copper inventories covered only 50 days of demand in 2024, while gold has decades’ worth of above-ground stocks. Like gold, silver has a significant amount of above-the-ground inventories/stocks, measured in years instead of days. Contrast this to copper, where we only have ~50 days of inventory in 2024.
Source: World Gold Council, Silver Institute, S&P Global, Wood Mac, Bernstein analysis

6.

US defence spending is the second highest per capita in the world and totals close to US$1 trillion annually. Unlike spending on Veterans’ Affairs, which is mandatory, the defence budget is classified as discretionary spending. As US federal debt has grown, interest payments have taken up an increasingly large share of the budget. This has reduced fiscal flexibility, as mandatory programs (such as Social Security, Medicare, and Veterans’ benefits) together with rising interest costs now dominate federal outlays.

Adding to this pressure, defence spending continues to increase. As a result, the pool of truly discretionary funding is shrinking. For context, annual interest payments on public debt are now roughly US$1 trillion, while total corporate tax revenue is approximately US$452 billion — highlighting the scale of the fiscal constraint.
Stockholm International Peace Research Institute (SIPRI), Congressional Budget Office, Office of Management and Budget

7.

For the first time since 1996, foreign central banks now hold more gold than U.S. Treasuries (U.S. debt) in their reserves, marking a historic turning point in global reserve management.
https://thedailyeconomy.org/article/liberty-eroding-gold-rising-30-years-of-warning/#:~:text=In%20dollar%20value%2C%20the%20world’s,cause%2C%20of%20gold’s%20price%20rise.

8.

In the last 15 years the share of US consumer spending accounted for by over 55’s has increased from less than 30% to over 45%. This is due in part to demographics, in part to the story of wealth and income distribution and in a small part to life-cycle dynamics.
Axios

9.

Japan has the oldest population among major economies, with 30% of its population aged 65 and older. China has the world’s largest senior population, with over 211 million people aged 65+. India has more than 100 million seniors, despite having one of the youngest populations among major economies. As the biggest economies age, they put more pressure on government spending and productivity.
IMF, UN

10.

More young Americans are living with parents than ever before. According to data from the US Census, 54% of women between 18 and 24 years old live at home, compared to 46% in 2003. For men, this figure is 58% today vs. 55% in 2003. This upwards trend in adults living at home with parents is also seen in the 25-34 year old age group too. 11% of women between 25 and 30 year olds live at home, compared to 7% in 2003. For men, this figure is 19% today vs. 14% in 2003. The cost of living continues to be a factor despite interest rates coming down in most developed countries, with a lack of housing being a major factor as populations grow.
US Census Bureau

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Hugh Selby-Smith

Market optimism is increasingly fuelled by rising debt and the belief that authorities will insulate investors from harm, rather than economic durability, yet opportunities remain for investors willing to rethink portfolio construction, Hugh Selby-Smith, co-CIO at Talaria Capital says.

As the global economy moves away from decades of deep globalisation and into a new monetary regime characterised by higher debt and greater government intervention, investors should prioritise short duration equities, companies with strong balance sheets, investment in real assets and ensuring portfolio diversification.

“The defining theme for financial markets is the transition in monetary regimes,” Selby-Smith says.

“Earnings growth in large-cap US equities has driven optimism, but that optimism is increasingly disconnected from the realities sustaining those profits.”

Governments are playing a more interventionist role in managing their economies, often pursuing political objectives at the expense of long-term economic discipline.

Selby-Smith says the scale of deficit spending and debt accumulation is frequently overlooked, despite its significant role in supporting growth in the corporate profit pool.

In the United States, interest payments on public debt are nearing USD 1 trillion, while total corporate tax receipts amount to just USD 452 billion. Selby-Smith says once with mandatory programs consuming most of the budget, even the most prominent policy initiatives face severe constraints.

“The gap between the ambitions of the now defunct Department of Government Efficiency (DOGE) and its limited achievements highlights how difficult it is for governments to meaningfully reduce spending,” he says.

“It’s less Department of Government Efficiency, and more Dead On Arrival.”

Despite these pressures, US equity valuations sit at the extreme end of their historical range, prompting investors to resist conformity and reassess how portfolios are constructed.

“Valuation is one of the few indicators with demonstrable explanatory power for long-run returns,” Selby-Smith says.

“From a shorter-term perspective, headline valuations for the S&P 500 are stretched.”

Over the past decade, the US corporate profit pool expanded by approximately USD 1.7 trillion, with almost ninety percent of that increase explained by growth in the deficit. Of nearly 35 million businesses, the 500 largest listed US companies captured around 70 percent of that growth, or roughly USD 1.2 trillion.

Selby-Smith says this concentration has been building for decades and reflects a market increasingly reliant on a narrow set of companies.

“Current conditions represent a classic peak-on-peak set-up, with elevated earnings multiples resting on unusually high profit margins,” he says.

“Governments are more likely to respond to rising debt through financial repression than austerity or growth, keeping interest rates below inflation to reduce the real value of government debt.”

Despite this backdrop, Selby-Smith says investors can still build portfolios with reasonable prospective risk-adjusted returns.

“At a minimum, elevated valuations and high concentration should prompt investors to ask where diversification is possible,” he says.

“There is value beyond expensive headline indices and mega-cap stocks. Even before drilling down into individual securities, the opportunity set outside US large caps offers a materially better trade-off between risk and expected real return than headline US indices today.”

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The conditions that allowed equity prices to gain over the last 30 years are shifting. 

“On the nominal cash flow growth side, forces that once supported cash flows, such as deep global integration, free trade, free movement of capital and access to low-cost production, are reversing,” Talaria Co-CIO Hugh Selby-Smith said.  

“Supply chains are reshoring, trade barriers are rising and labour costs are climbing up, all which slow the rate of cashflow growth.” 

“For investors, we believe this marks the end of the golden era, in which nominal cash flow growth and the cost of funding diverged to drive up asset prices. In an environment where this dynamic is, at best, no longer a tailwind, rising valuations over time can no longer be relied upon – bringing a renewed focus on what investors are paying for assets,” Mr Selby-Smith said, pointing to the chart below that highlights this divergence.  

 
 
“Funding rates have risen sharply and may remain high. The headlines have been about trade wars, but at heart this is a fight for capital. We feel that the ear of the near free movement of capital is coming to an end with implications for the US currency, stock and bond markets.” 

For investors seeking to build more resilient portfolios in such an environment, asset allocation will be crucial.  

“In a world where the cost of funding matters again, the timing and certainty of cash flows will enjoy renewed focus. Duration captures how exposed an investment is to changes in interest rates, and shorter duration assets are less vulnerable when interest rates are rising,” Mr Selby-Smith said. 

“We also advocate investing in companies with strong balance sheets. Companies with low leverage and strong cash flows are better positioned to manage higher refinancing costs and economic volatility. They also have more flexibility where other companies could be more constrained to protect their revenues. 

“In addition, exposure to physical or inflation-linked assets like commodities and infrastructure can help preserve purchasing power if inflation is persistent.  

“Diversification too remains important. In a regime defined by fragmentation, higher volatility and less predictability, a portfolio that draws from uncorrelated sources of return and has exposure to ‘under-owned’ assets is more resilient.” 

According to Mr Selby-Smith, capital has earned disproportionate returns over labour for decades, with the resulting inequality behind the recent rise in populism. 

“Geopolitics has played its part as, for example, economic nationalism has asserted itself. The pandemic also had a huge impact as did the shock of resurgent inflation. In combination these and other elements have exposed fragilities and forced a re-evaluation of capital, risk and global interdependence,” Mr Selby-Smith said. 

“This era of globalisation which we identify as starting in the early 1990’s brought many significant benefits but also gave rise to vast levels of non-financial debt to GDP, enormous US twin deficits reliant on foreign funding, a distorted global manufacturing map and much higher returns to capital than to labour. Now, as these imbalances unwind, we believe the free flow of capital can no longer be taken for granted. 
 
“We believe investors should prioritise short duration, strong balance sheets, real assets, and diversification. Underlying this view is our premise that while valuation has always mattered, it hasn’t always mattered to everyone. This ought to change.” 

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Global investors are exhibiting a high level of complacency by betting on falling US bond yields and are overlooking fundamental risks to inflation and ignoring the potential for other financial shocks, Hugh Selby-Smith, co-chief investment officer at Talaria Capital says.

“It’s not what happens that matters but what’s priced in,” Mr Selby-Smith says. 

“The overwhelming bet on falling US long bond yields, despite considerable economic uncertainty and still-high S&P 500 valuations, is historically aligned with low or negative long-term returns from equities. This contrasts with consensus forecasts that assume double-digit earnings growth, indicating a market perhaps too sanguine about the future.”  

According to Mr Selby-Smith, since 2020, the proportion of global equities positively correlated to falling US long bond yields has ballooned from just over 10 per cent to around 70 per cent today. The growing weight of the US equity market, and within that, the increasing dominance of technology securities, which derives so much of their value from future years, has made bond duration an ever more significant factor in investors’ portfolios and equity valuations.  

“In outlining arguments for lower long bond yields, we suggest that market pricing assumes a lot of directional certainty where none exists. Most investors in global equities have positioned themselves for falling yields. There is little contingency planning in that and a great deal of confidence,” Mr Selby-Smith says.

“In the bond yield discussion, the US remains fundamentally reliant on large-scale foreign capital inflows to balance its external accounts, US$1.9 trillion last year. That reliance is now under pressure from both shifting policy priorities from the Trump Administration and growing economic nationalism, which we have seen rampant examples of in recent days, as trade policies threaten both global growth and falling inflation. 

“A range of governments are looking to retain capital for domestic projects, with initiatives in Europe, the UK, Australia and elsewhere aiming to redirect savings away from US assets. If foreign appetite softens, the consequences could extend beyond US long bonds, challenging the broader US asset and currency superstructure.” 

Mr Selby-Smith says the conditions that allowed equity valuation to become a sideshow for investors no longer apply in 2025 and the recent fall in global share markets reflect that.  

“The investment landscape has decisively changed in 2025 as the globalisation in evidence over the last 30 years is in reverse, making capital scarcer. In terms of first principles, nominal growth and the cost of capital are no longer diverging; dismissing equity valuations and adopting a set-and-forget mindset is no longer likely to be the answer,” he says. 

“The market is always a ‘two-handed engine’, what it takes away with one it gives with the other. There are still opportunities for investors to reap from the recent sharp moves in global equities. For example, stocks that have the stability desirable in challenging times are trading at a rare discount to the market outside of recessions (see the chart below).  

“Taking advantage of these opportunities requires a willingness to engage with areas of the market that have been out of fashion, and to use levers of return that actually benefit from volatility.” 

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Hugh Selby-Smith

Be patient. Watched stock never boils. Peter Lynch

With global equity markets continuing to soar, an investment strategy that offers some genuine diversification away from the crowd should serve Australian investors well in 2025, Hugh Selby-Smith, co-CIO at Talaria Capital says.

He says strong growth in U.S. equity markets has stemmed predominately from a narrow cohort of stocks and valuation expansion rather than solid earnings growth, creating significant risk for investors. With the S&P 500 up 23 per cent in 2024, Selby-Smith says investors should avoid overvalued sectors and focus their incremental dollars on assets with strong fundamentals and cheap starting valuations.

“In uncertain markets, resilience and diversification are key, and at today’s valuations, there is little room for error,” Mr Selby-Smith said.

“Everyone assumes that things like leverage, scale, and disruption bring opportunity. In 2025, we believe success will come not from following the crowd but from having the patience and rationality to invest strategically.

“The idea that prudence brings opportunity may raise eyebrows, but employing a disciplined approach will help investors resist the temptation to chase short-term gains which carry significant risk.”

The year ahead poses a critical moment for Australian investors to recalibrate their strategies.

“Investors will inevitably face mounting pressures to follow market momentum, but it’s important that they seek patience and rationality to set them up for long-term performance,” Mr Selby-Smith said.

“By prioritising sectors with attractive valuations and reduced leverage, investors can put themselves in a better position to protect their portfolio against speculative risks.”

Despite avoiding U.S. tech entirely, Talaria’s Global Equity Fund has delivered solid returns, proving that prudent investments can yield competitive returns without excessive risk.

“Talaria’s rolling three-year annualised net return of 10.5 per cent demonstrates the fund’s consistent ability to weather market downturns while maintaining lower volatility,” Mr Selby-Smith said.

“Our goal is not to outperform in every market rally, but to offer stability and consistency giving the best prospect of compounding wealth long term. After all a wise sage once said: “The stock market is a device to transfer money from the impatient to the patient.”

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Mr Selby-Smith will be based in Melbourne and report to chief investment officer Chad Padowitz.

Mr Selby-Smith was most recently co-portfolio manager at Omni Partners in London, where he was responsible for the firm’s pan-European strategy.

He has also worked with TT International, Goldman Sachs International, Dresdner Kleinwort and ING Barings.

Mr Padowitz said Mr Selby-Smith brings complementary depth of experience and knowledge to the existing team.

“This newly-created role adds further depth to our research effort, which is the most important component of our investment strategy and offering to investors.

“Hugh brings many years of experience in research to the position, which will be invaluable.  His experience as a buy-side and sell-side analyst across both the US and European markets will be particularly useful,” Mr Padowitz said.

Mr Selby-Smith holds a bachelor of commerce (economics, mathematics and history) and a bachelor of letters (economics and philosophy) from the University of Melbourne.

The appointment follows the recent ‘Recommended’ ratings from Lonsec for the Wingate Global Equity Fund (both Wholesale Units and Hedged). In its rating reports, Lonsec said: “Underpinning this rating is theFund’s ability to deliver the upside potential of equity returns but with lower volatility; consistentgeneration of income (mostly option premium) tosupplement returns; disciplined investment process;and an adequately resourced and experienced investment team that is well aligned to the businessand investors.”

Research house Zenith also upgraded the funds to a ‘Recommended’ rating at its most recent review.

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