Shaken, Not Stirred

This week, I sat down and had a chat with the brilliant Karen Ward. She’s a Managing Director at J.P. Morgan Asset Management and their Chief Market Strategist for Europe, Middle East and Africa. She may have been a former adviser to the Chancellor, but when she told me she had stayed up to bake beetroot chocolate brownies for the school cake sale after a long day at work, I felt she really needed some advice from me. Colin the Caterpillar exists for a reason. And kids like it more than any beetroot weirdy-business. 😊 But I digress.

I know many of our readers feel nervous about potential AI bubbles, high valuations, shaken bond markets, spiking oil prices and more. However, Karen is pretty upbeat about markets. She also thinks interest ratesThe amount that a lender charges someone for taking out a loan or a mortgage. It's calculated as a percentage of the amount borrowed - for example, 3%. will go up in November, sees potential in European shares and, despite the bond headlines this week, isn’t too worried about the amount of debt around. As for geopolitics – “all this chaos is just causing much more spending.”

Bonds – A Licence To Yield

BondsA type of asset that represents a loan, usually issued by a government, company or agency that wants to raise money to fund its operations. have hit the headlines this week – yieldsThe return or profit on an investment, usually expressed as a percentage of the total price per year. For example, if the yield on a bond was 5%, this means an investor with £100 in that bond would get £5 in returns per year. hit 5.5% for 10-year bonds (loans we make to the Government in return for interest), their highest since 2007, when Blair was still PM. They're so high because investors are miserable about bonds all over the world, worried about inflationTerm used to describe how quickly the prices of goods and services is rising over a period of time. In periods of high inflation, prices are increasing rapidly, whereas low inflation means prices are increasing by only a small amount. caused by high oil prices and think interest rates are heading up… Put very simply, there is a shed load of debt around and tons of bonds out there, so the Government has to pay higher yields to tempt investors. Also, higher interest rates at the bank mean bonds have to offer us more to compete.

OctoFTSE 

Sometimes, higher bond yields can mean a slumpy stock market, but Karen is positive on the outlook. She points out that personal borrowing in the UK isn’t that high, nor is company borrowing. It’s mostly Government borrowing. If Governments are borrowing to pay for bad stuff (throwing money around on wasteful things and non-productive things), then it’s a negative. But if they’re borrowing to do stuff – infrastructure projects, energy projects, AI projects and more – well, that’s good for the stock market because we’re buying and doing and spending. So, if you borrow to spend on good stuff… happy days!

You can hear Karen’s response to my question about the outlook below for the next 12 months and what she’d say to nervous investors.

Bearish readers will observe the high amount of welfare spending, the high tax environment and the huge cost to service our debt. However, these things are relative – we're bossing things compared to France and we have less debt than the US. There is a perfectly decent case to be made for the FTSE and the UK and indeed Karen is positive on the outlook for Europe as a region.

You Only Fix Twice

On the more immediate here and now, what do we know? We know energy prices are going to go up. Check your energy deal and review any fixes now. And I feel pretty sure interest rates are heading up. Soon. If your fixed mortgage is coming to an end in the next 6 months, for Gawd’s sakes get a quote now, and then decide later whether to take it up or not. Rates are not coming down, my friends.

The World Is (Not) Enough

As for markets, more so now than ever, we need to diversifyThe process of spreading your investment portfolio across different asset classes, such as partially in shares and partially in bonds, in order to reduce risk.. The world is uncertain, but we're still spending, and companies are still earning and there is still lots of good news out there.

Have some cash as an emergency buffer and for shorter-term needs – lock in a very good rate. Retirement planning? Annuities are worth a look. Consider some gold (finger). And make sure you’re diversified both by sector and by region. Here’s a thought. If the tech sector or the US wobbles, and you’re fully in passive funds, you will be very, very exposed to the fate of about 10 companies.

Just 10 US tech-related firms make up about 27% of the MSCI World IndexA global index that tracks large and medium-sized companies from 23 developed countries around the world.. Gulp. That’s a big old bet to make. Even moving to what is known as the ACWI will diversify you a little more – this is a global index which includes emerging markets too, so you get Taiwan’s TSMC in the top 10 here, for example, instead of ‘Moonraker’ Elon Musk’s Tesla.

Have a wonderful weekend, everyone, enjoying these last light and sunny days. I’m watching Celebrity Traitors this year, mostly because the thought of watching Miranda do anything under the steely, elegant gaze of Jerry Hall is just pure joy. As is watching Richard E Grant and bellowing “We want the finest wines available to humanity. We want them here, and we want them now!”

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