There’s rarely a shortage of headlines for investors to digest.
AI continues to dominate conversations around equity markets. Government borrowing is attracting more attention. And, after a period when investors became accustomed to interest rates heading down, central banks are reminding us that the journey was never going to be a straight line.
Closer to home, the UK economy continues to face its own challenges, with the Budget on 28 October adding another date to investors’ calendars.
So, what am I actually watching?
Here are five things I think are worth paying attention to right now, and just as importantly, what they could mean for long-term investors.
1. AI: WHERE DOES THE STORY GO NEXT?
It’s almost impossible to talk about equity markets without talking about AI.
Concerns about an AI bubble continue to make headlines. But beneath that debate, something interesting is happening.
The first phase of the AI boom was dominated by the US mega-cap technology companies, particularly the so-called ‘Magnificent Seven’.
Attention then moved towards the companies providing the ‘picks and shovels’ behind AI: semiconductors, chips and the infrastructure needed to support huge amounts of computing power.
Now markets are beginning to ask the next question:
Where might the benefits of AI spread next?
Software and business services, industrials and automation, power generation and grid infrastructure, and financial services are all areas investors are watching.
As we explored in our July Investment Committee update, this would fit a pattern we’ve seen with previous technological advances. A new technology emerges, investment pours into the businesses enabling it, and adoption gradually spreads across the wider economy.
Markets, of course, don’t wait around for that to happen. They’re forward-looking and are already trying to anticipate who could benefit next.
There is another side to this.
History suggests that when huge amounts of capital chase a new technology, there can eventually be too much capacity. New competitors arrive, prices fall and a shake-out follows.
Could that happen with AI? Absolutely.
Could it happen next year, or several years from now? Nobody knows.
My view: trying to predict the exact moment when enthusiasm becomes excess is incredibly difficult. A broadly diversified portfolio remains one of the best defences against getting that call wrong.
2. GOVERNMENT DEBT IS BECOMING HARDER TO IGNORE
Another theme quietly moving up investors’ watchlists is government debt.
Since the pandemic, government debt across many developed economies has increased significantly relative to the size of their economies.
The question markets are asking is simple:
How long can that continue?
There are different concerns in different countries. Persistent US fiscal deficits, the UK’s debt-servicing costs and Japan’s high level of government debt, . At the same time, central banks are no longer providing the same level of support to bond markets that investors became accustomed to in previous years.
That makes long-term government bond yields particularly interesting.
If yields remain elevated, they could create further bouts of market volatility. But there’s another side to the story.
At some point, higher bond yields can make bonds increasingly attractive to investors. If the potential return available from government bonds becomes compelling enough, capital can begin moving away from equities.
It’s another reason we believe in balance.
My view: equities and bonds have different jobs to do. Holding both within a diversified portfolio means you aren’t relying on one particular market environment to deliver your long-term plan.
3. INTEREST RATES HAVE CHANGED DIRECTION AGAIN
For much of the past couple of years, the direction of travel appeared relatively straightforward: inflation was falling and interest rates were expected to follow.
That picture has become more complicated.
The US Federal Reserve has increased rates for the first time since July 2023, while the European Central Bank has also increased rates. In the UK, the Bank of England held Bank Rate at its latest meeting, although three members of its Monetary Policy Committee voted for an increase.
Why the change?
Inflation remains stubborn, while higher energy prices associated with the ongoing Middle East conflict have created additional inflationary pressure.
That leaves central banks facing a familiar balancing act: contain inflation without putting unnecessary pressure on economic growth.
It also raises a bigger question.
Are we returning to a world where inflation and interest rates simply sit higher than investors became accustomed to during the ultra-low-rate years?
It’s certainly possible.
But that doesn’t automatically spell bad news for markets.
Markets generally dislike uncontrolled inflation and uncertainty. Central banks demonstrating that they’re prepared to act can therefore sometimes be reassuring, even when the action itself is an interest rate rise.
It’s one of those slightly strange moments in investing where seemingly bad news can be interpreted rather differently by markets.
My view: rather than trying to predict every central bank decision, investors should be prepared for a range of interest-rate environments. Once again, diversification matters.
4. THE UK HAS SOME DIFFICULT QUESTIONS TO ANSWER
The UK economy continues to face some significant structural challenges.
Energy costs, taxation, regulation, productivity and government finances are all part of the debate around how the UK generates stronger long-term economic growth.
But there’s an important distinction for investors.
The UK economy and the UK stock market aren’t the same thing.
Despite the economic headwinds, UK equities have performed relatively well over the past year and continue to trade at different valuations to a number of other major equity markets.
Many companies listed in London also generate significant amounts of their revenue overseas, meaning their fortunes aren’t determined solely by the domestic economy.
For our clients, there is an even bigger point.
We invest globally.
The UK represents only a relatively small part of the global equity market, so building a portfolio predominantly around where you happen to live can mean overlooking opportunities elsewhere.
My view: whatever happens to the UK economy from here, it reinforces why we don’t believe investors should make their home market the centre of their investment universe.
5. AND THEN THERE’S THE BUDGET…
The Budget takes place on 28 October, so inevitably the speculation machine is already warming up.
There will be plenty written between now and then about what the Chancellor might, or might not change.
My first thought is probably the most important one:
Don’t let speculation dictate your financial plan.
We don’t yet know what will be announced. Making significant financial decisions based purely on newspaper headlines or predictions can create unintended consequences.
That doesn’t mean doing nothing.
The weeks before a Budget can be a useful opportunity to review plans that were already on your radar and consider, with professional advice, whether there is a reason to bring any of them forward.
That might include reviewing:
- planned disposals and potential capital gains;
- gifts that already form part of your estate planning;
- pension contributions;
- ISA allowances; and
- any plans involving pension tax-free cash.
The important distinction is between accelerating a sensible decision and making a new decision purely because you’re worried about what might happen.
They are two very different things.
We’ll return to the Budget separately as the picture becomes clearer and look at the practical planning considerations in more detail. Whether any action is appropriate will depend on your personal circumstances and objectives. Tax treatment depends on individual circumstances and may change in future.”
MY FINAL THOUGHT
AI. Government debt. Interest rates. The UK economy. The Budget.
There is plenty for investors to think about.
But there always is.
The individual headlines change, while many of the principles of successful long-term investing don’t.
Markets are forward-looking. They adjust quickly. They experience periods of excitement and uncertainty. And they have a habit of making confident short-term predictions look rather foolish.
That’s why our approach remains deliberately consistent: diversify, keep your emotions in check, stay focused on the long term and remember what your investments are actually there to achieve.
If any of the issues I’ve covered have made you think about your own investments or financial plan, speak to your adviser. Sometimes a conversation is all that’s needed to put the headlines back into perspective.
Past performance is no guarantee of future returns, and the value of investments and the income from them are not guaranteed and can fall as well as rise. The returns from your portfolio will fluctuate over time. On encashment of your investment, you may not get back the full amount invested and could lose part or all of your capital. This communication is for general information only and is not intended to be individual advice. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular investment strategy, sector or product. You are recommended to seek competent professional advice before taking any action.
