Interest rates on hold and AI giddiness continues

The latest episode of ‘Guess The Interest Rate’ aired yesterday and the Bank of England voted to keep interest rates on hold at 5.25%. No shock evictions or banishments here although one lone voice on the Monetary Policy Committee did call for a cut.

It’s Caution City out there – we are told interest rates may fall this year but not by as much as the 1% that markets are betting on. Inflation might hit the target of 2%, yes, but blink and you’ll potentially miss it because they could well creep up again from there. The clear message is don’t get giddy and bank on rates falling much lower in 2024.

Over in the US, Jay Powell – boss of the Federal Reserve – cooled speculation that rates could come down as soon as March, saying this was not “the base case”.

[Digression alert: Not the base case. What a wonderful phrase. It makes everything sound so much more serious and intelligent. Sorry kids, but it’s not January anymore and getting home before 10pm entirely sober tonight is “not the base case”. Size 10 jeans ever again? Will I be on time tomorrow? This is not the base case. This fun phrase makes all your failures sound so intellectual. Try it!]

One thing I love about financial markets is they do not lie. As a barometer of public opinion, money talks. In the futures markets – where people make and lose fortunes betting on which way prices will move – the odds were 60% for a cut in March BEFORE Powell’s comments, and 35% after. That is as precise an answer as you can get to how probable the market thinks a cut in March is.

Market reactions

US traders were disappointed that the Powers That Be are not inclined to cut rates yet – and hence encourage borrowing, hiring, investing and growth – and collectively dumped some stock on Wednesday, giving US markets their worst day in 4 months, as the S&P fell by 1.6% in a reactive strop.

However let’s keep Wednesday’s 1.6% fall in perspective. Things bounced almost straight back on Thursday as Big Tech stocks led a mirror reversal of the previous day.

January faves

The US tech sector with its underlying AI allure remains flavour of the month. Platform interactive investor has reported its best-selling funds and trusts for January – the L&G Global Technology Index fund and Scottish Mortgage top the funds and trusts bestsellers respectively, and Polar Capital Technology and Allianz Technology are sector-specific bestsellers amongst investment trusts.

Scottish Mortgage shares are sitting at about half their 2021 levels. An argument against them is that interest rates are not likely to fall much soon and textbooks suggest this typically favours stable, defensive stocks (i.e. not the high growth, riskier tech stuff which they hold). But on the other hand they are trading at a discount of about 10%, they give you access to some bloody interesting companies including some unlisted plays like Elon Musk’s SpaceX and at around £7.70 they look decently priced to me.

[For more learning about investment trusts and how to think about discounts, check out this article from BlackRock. Or if you are more interested in biotechnology and the opportunities here, this piece from the team at Schroders International Biotechnology Trust is worth a read.]

And finally, two shares in the Scottish Mortgage portfolio which investors can of course buy individually are Nvidia and Ferrari. Nvidia has risen yet again by an almost unbelievable 27% in January (bonkers) and Ferrari shares jumped by 13% on Thursday when Lewis Hamilton said that he would go and drive around in circles for them in 2025! Go figure. One day in a different dimension and a different life I may understand the alleged joys of F1. But that is not the base case.

Have a great weekend everyone,

Holly

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