Soggy Chips and the Kospi Kreamed

A bit of a worrisome week financially – US inflation is hot at 3.7%, interest rates are likely to head up, the oil price has surged as global political tensions rise and the upcoming Budget rumour mill has kicked into play. Interest rates are likely to head up, the oil price has surged as global political tensions rise and the upcoming Budget rumour mill has kicked into play.

Despite this, markets have held relatively steady in October, with AI stocks, chipmakers and some Asian markets taking all of the pain.

So, what are people buying? Looking at the best-selling funds for last month, the shine somewhat went off specialist technology or S&P 500An index that tracks the performance of the 500 largest publicly traded companies in the United States. It's often used as a benchmark for the overall global stock market. funds, and the move was definitely to larger mixed bags of global shares or else cash funds. 

Over in Investment Trusts and the respected City of London clocked up its 60th consecutive year of dividend increases, also featuring on the best-selling lists of all major platforms we review. In short, it’s a very well tested bet for anyone looking for a collection of old school investments which pay out a decent and reliable income stream.

Income continues to be a priority for Investment Trust investors. Tritax Big Box REIT, which invests in logistics warehouses and has a yield of 5.7%, appeared on three of the four platforms, while Schroder Real Estate Investment Trust (8.9% yield) was a top seller on the ii platform. 

And over in the world of cheap, simple Exchange Traded Funds, as well as the usual global mixes, semiconductors and gold proved popular. The VanEck Semiconductor ETF appeared on all major platforms we track, alongside the iShares Physical Gold ETF.

Kospi Kreamed 

Those who bought into semiconductors will be hurting today after a ‘Black Thursday’ hit Asian markets. Over in Korea, the chip-heavy Kospi Index fell by more than 8%, led by SK Hynix and Samsung which plummeted, triggering the circuit-breakers, which pause trading to give everyone the chance to breathe and shout “jinjeonghae!” [Korean for “chill out”, since you ask!]

Chips all over the world have been mashed. The Philadelphia Semiconductor Index (the main chip benchmark) fell again yesterday, its seventh losing day in a row, down about 12% from its early-October peak. Ouch.

Why the soggy chips?

In a word, inflation. US inflation is hot hot hot and so we think interest rates will go up, possibly at the 27th/28th October Fed meeting.

Higher interest rates really hurt tech stocks with punchy valuations. Here’s why. If you’re borrowing a shed load to pay for all your data centres, it hurts. Higher rates also make safe old cash in the bank look more appealing to investors than risky shares. And one last thing – if you’re banking on returns to come in about 5-10 years’ time from high-growth speculative stocks, then the more you can get from cash today, the less appealing taking a long-term punt looks.

Let’s break this down. Imagine a friend says, “Lend me £100 today and I’ll give you back £150 in 5 years’ time.” If interest rates were 10%, you’d think, “Get lost, punk, I love my bank!” If rates were 2%, you might be tempted, but 5 years is a long time and your pal might become inept, ga-ga, poorly regulated or replaced by a new model, etc. These risks and trade-offs go through investors’ heads about tech stocks when interest rates move and this concept is what people with pointy heads call “Discounted cashflow valuation models”.

Here’s another example. If the person next to you on the sofa at night (playing the role of Tech Stocks) could hit the gym a bit more, but the alternative is Jabba The Hutt, you still think they're cute. This is the low interest rate scenario. But if the alternative is Brad Pitt in the 90s, then eat my dust. Who wants tech stocks when you can have nice, honed, guaranteed returns from Brad. Geddit? 

Is the foreign sell-off overdone? The Korea Times triumphantly reports a Wall St analyst predicting that it is. "Memory is the heart and lungs of the AI revolution… It just creates an opportunity to own these stocks when irrationality hits the market, which I think is what's happening right now here in Korea.” Would I bet on it? It’s a difficult call but you can watch my chat with J.P. Morgan Chief Market Strategist Karen Ward below, when I asked her if the AI bubble was going to burst.

Enough chips, I want a ready meal

For those who prefer to leave the detailed investment decisions to someone else, we're just finalising the performance data for ready-made portfolios to the end of September. There are 5 higher risk options which have returned over 18% over the last 12 months. After fees. That is not to be sneezed at. More coming on this next week.

If all of this gives you brain fry and you’re vaguely wondering if it might be worth getting some financial advice, I’ve considered when it’s potentially helpful and when you can probably DIY. And our Advice Hub has more onwhat to expect, what you might pay and which questions to ask.

Over and out for this week, everyone. Teenagers around the country are in Halloween planning mode but the outfits all seem to be foxy, cute animals wearing furry crop tops. My suggestions of blacked-out teeth, hanging out eyeballs and old crone robes don’t seem to be cutting it? Weird that.

Holly