A culinary trip through markets

Regular readers will know I like to start with a biting political analysis of the issues du jour. I’m all for locally grown produce and buy my Braeburns. But I draw the line at turnips. Scarred by being force-fed orange cubes at school of soggy swede-y mush, I resist this family of vegetables. As promoted to us by a politician better known for her love of 20-a-day, than her 5-a-day.

Turnips are the food of the devil. Just say “No”, kids.

From devilish food to the Death Zone

This week a number of economists have forecast that inflation will fall faster than the Bank of England has suggested, with a few tipping a return to the more normal rate of 2% by the end of the year. The sharp falls on wholesale gas prices are making everyone feel a bit more optimistic although the consensus is we will still endure a mild recession. If inflation does fall, then inevitably we will see interest rates come down.

However the economy is still weak, and companies are doing it tough. The recent rally in markets and the valuations of companies seems disconnected from sales data and what’s happening on the ground. Wall Street is ignoring the High Street.

Over in the US, the folks at Morgan Stanley have come over all bleak, talking about a “death zone”. They think there has been too much money sloshing around the system and the recent rallies in markets are blips before a fall.

They are focused on data which point to the Equity Risk Premium. This is currently around 168bps. “No!” you cry… “What are you on about, Holly, you old turnip?”

Equity is a silly way of saying Shares. Risk is the fact that this is not cash under your bed. Premium is the extra you get. So when you add this all up, it means how much extra could I make, for jumping on the rollercoaster of shares, as opposed to lying on the sofa of cash? Bps are not Beats Per Minute but basis points which is another silly term to talk about small percentages. 100 basis points is a way to say 1% if you want to sound like an economist and confuse people.

So if we add all this up, the average investor can currently expect to make about 1.68%ish more in shares than in cash. Which isn’t great. 5% might feel more normal.

Back in Wall Street and at Miserable Morgan Stanley, the conclusion is as follows: “With the Equity Risk Premium at its lowest level since 2007, the risk-reward for stocks is extremely poor, particularly with a Fed that is likely far from done, and earnings expectations that are 10-20% too high. It’s time to head back to base camp before the next guide down in earnings.”

Pack your Kendall Mint Cake, people.

Pie and Chips versus Gourmet

As we look for opportunities (and there are always opportunities – in bleak old 2022 the Turkish market was the best performer, returning 114%), investors are always drawn to thematic investing. Water, clean energy, food or technology, there is usually an interesting narrative to listen to.

I’m in two minds about thematic investing. It can be a bit like going to a really fancy restaurant and when you get there, you realise you really wanted a pie and chips, which would have been cheaper, more filling and keep you going for longer than sauteed Jerusalem artichokes. I think the reality is that for many investors, a simple handful of low-cost Exchange Traded Funds, or a mixed bag of investments known as a multi-asset fund or a robo adviser, will form very good, core building blocks of your investments and do the job well.

But I also like to back a few sectors or themes, and to make some more active bets. Technology is of course one of those sectors which is now ubiquitous and underpins everything. This week I hosted a webinar with Ben Rogoff who runs the Polar Capital Investment Trust. He’s been investing in tech for decades now and it was super interesting to hear his views on AI, semiconductors, cyber security and more – and how he thinks about valuations and opportunities. His trust has about 10% in Microsoft and Apple – and only about 1.5% in Amazon and 0.6% in Tesla. I asked him why.

You can watch this on catch-up – with input from the fantastic chartered financial planner Dennis Hall, I do recommend a listen of what was quite a broad ranging conversation.

Mints with your coffee

As we draw our meal to a close, despite the uncertainty, I’m still doing what I always do. Chipping in little and often and using my tax allowances. If you want to do something before 5th April, then check out our Best Buys 2023 for an ISA, pension, Lifetime ISA or Junior ISA which might suit you. You can hear more from one of our Sustainable Best Buy winners, The Big Exchange (investment cousins to The Big Issue), in this week’s featured article.

And finally, our next webinar is a more general one particularly suitable for less confident investors. You can register to join myself and 2 financial coaches from Bestinvest and we’ll be taking questions on all things investing and pensions – getting started, maxing your allowances, building a sensible portfolio, ISA or pension? – these sorts of questions and more.

Have a lovely weekend everyone. I’ll leave you with some unregulated advice. Resist the urge to panic buy cucumbers. You’ll be fine.

Holly