Ugly numbers, a tech omelette and beautiful bonds

A rather unflattering assessment of British infrastructure this week. As the nation shivered and temperatures fell, instead of mobilising the latest snow ploughs or steam jets, the advice was instead that we should walk like penguins. Good to see that we continue to lead the world with technological ambition.

Bad news this morning in the shape of the retail figures for December which unexpectedly fell by over 3% in December. The supermarkets held up OK but other brands such as Superdry and JD Sports had a miserable time. Oh dear.

The ugly numbers clearly point to a British consumer who is cutting back and spending less, as inflation and the cost of living bites. If we add this to the surprise growth in inflation announced this week, it’s not a very pretty picture.

The conundrum for the Bank of England will be this – what to do if inflation remains stubborn (suggesting they need to keep rates where they are), but the economy slows towards a recession (suggesting they need to cut rates to give us an economic caffeine shot)? The consensus view remains mid-year for a fall in rates, but this is a moving picture and I don’t think anyone knows what will happen yet. Or when.

Yesterday I had a lovely breakfast in London with Justin, the Chief Investment Office for St James’s Place. We chatted about the outlook for 2024. He is concerned that some are getting impatient with the old rule of diversification and focussing only on performance, forgetting about risk which is at the other end of the investment seesaw. The name of the game is to balance returns at one end with risk at the other – you want to make as much as possible whilst risking as little as possible. But 7 tech shares in the States are presenting some very challenging risks to manage.

The technology omelette

One of the ways we can mitigate risk is of course not to have all our eggs in one basket. Trouble is, right now, it’s harder than it’s ever been to avoid having an enormous technology omelette in our investment baskets.

About 30% of the S&P 500 is in the Magnificent Seven. Apple, Amazon, Alphabet (Google), Meta (Facebook), Microsoft, Tesla and Nvidia. These 7 shares alone accounted for about 75% of the S&P 500’s gain of more than 20% last year. But what’s the outlook? Opinion is divided. Goldman Sachs is optimistic and expects the gains to continue. Others say they are ludicrously overpriced and cruising for a bruising.

Whatever your view, it’s interesting to see how much of your savings stash is allocated to these Seven. If you lift the bonnet, they are everywhere! For example, I have the Fidelity Index World Fund in my pension account. I’ve held it for decades. It costs me 0.12% a year and currently has about 1,471 shares in it. So it’s a super cheap and easy way to hold an enormous collection of global shares. To be honest, it would do a fine job for anyone looking for a low maintenance way to invest, set and forget, and this may be why it featured again in the best-selling list of funds on platforms in December 2023.

However, when I checked the top 10 holdings in this huge Fidelity financial Pick’n’Mix today, a whopping 18% of it is in these 7 companies. You don’t have to be an Economics genius to see the risk of most Western pension holders and investors being so exposed to the fate of just 7 companies. If I order Pick’n’Mix, I don’t want 1 sweet in every 5 to be a fizzy Coke bottle! So before you succumb to FOMO and think maybe you should pile into Nvidia shares, have a look at the Top 10 holdings of any funds you have. You may already own more than you think.

And beautiful bonds…

The other investment oddity which I discussed with Justin was the behaviour of bonds over recent years. We saw up close and personal that bonds behaved very badly in 2022 (remember that mini-budget?) because all of the so-called ‘Low Risk’ robo adviser portfolios we track at Boring Money went pear-shaped. Bonds did not smooth out the volatility of shares and they didn’t behave more sedately. They broke the rules and burned many lower-risk investors in the process.

But then in 2023, bonds rallied back and hopes are that bonds will have a good year in 2024. The logic is that as interest rates peak and then fall, so bond prices go up. DIY investors tend to overlook bonds in favour of shares – if this is you, make sure you’re at least considering this once-boring asset class as it migrates from Duckling to Swan. And mug up on what’s called ‘duration’ so you have a decent mix of long-term and shorter-term stuff.

That’s it for this week, folks. A few final reading suggestions from me. If you’re interested in AI, this piece by Schroders looks at opportunities in the sector. Also, air fares were a key factor cited in rising inflation figures for the month. If you think the growth in travel is an investment opportunity, Janus Henderson’s piece is worth a read. And if you missed our monthly round-up of best-selling funds, trusts and ETFs on major platforms last month, you can see the full list here.

Finally, a very happy birthday to my Dad tomorrow, who I hope will be reading this in good health on the beach after months of battling nasty bugs. Have a great day, Dad. Thanks for persuading me thirty years ago that investments were actually interesting as we competed with dodgy trades in high-risk things to try and beat each other! Not a tip, readers! But I remain convinced that my Filipino nickel beat his Uruguayan copper. Have a great weekend everyone. More Traitors catch-up for me. Quite why it’s so compelling, I’m not sure!

Holly

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