Changing leadership?

What’s happening in the markets?

Hello, it's Friday, the 7th of November. Been away for a couple of weeks, so I thought what we'd do in this video is really sort of recap over the last couple of months, see what's been the main headlines, what's being driving markets, what's going on in markets, and of course, start to sort of paint a picture for the tail end of 2025, which we are rapidly approaching.

So the first bit of news that's worth digging into is the continued shutdown of the US government. There's a large swathe of non-essential government jobs are sort of on ice currently, which means that a lot of those roles that are performed by non- essential government workers have been put on ice too. The obvious one and the important one from an investment perspective is all the collation of data, huge swathes of data get fed into the official sector, most notably of course the Federal Reserve when you're thinking about monetary policy. And the analogy was used, I think, last week that the Federal Reserve is starting to drive in fog. It's a lovely image, obviously, with a lack of data, lack of information coming your way, it very much is like sort of driving through fog in some ways. But perhaps that overplays it a little bit when you think about it there's lots of private data available, lots of different ways that the Federal Reserve can get hold of perhaps less rich, but still useful information. And then the other point bear in mind when it comes to economies of course is you know they tend to ebb and flow, there tends to be a sort of a gentler trend in place rather than things sort of turning on a sixpence and so perhaps rather than driving in fog perhaps they're more really sort of entering a bit of a misty patch. Nevertheless, whichever way you think about it, it must be the case that the level of confidence in the decision-making around the Federal Reserve will be reducing and perhaps, if nothing else, that would likely lead them to do less rather than be active in their decision making and end up heading the wrong way. The background to that, of course, is the continued political pressure to get interest rates down in the US. That's clearly a firm desire on the part of the US government, so there's a balancing act at play there.

Tariffs continue to be in the headlines, their market impact has been relatively modest over the last couple of months. They're clearly biting, you're seeing the revenue related to tariffs go up, there's less clear evidence and clearly the shutdown is not helping there, there's less evidence this is passing through into consumer prices. There is less evidence it's affecting consumer confidence, it's impacting business confidence but you know the longer term planning and sentimental implications of these tariffs will really only become clear in the years to come. But in the short term, it seems as though we're sort of kicking the can down the road. The deal with China sort of is an example of that and things seem to be functioning fairly well regardless of that sort of still very material tariff backdrop in the US.

Another area worth focusing on, the budget in the UK, you'll have no doubt picked up newspapers and looked online and you'll have heard lots of different theories coming out in terms of what the government will and won't do in the budget which of course has been delayed. There's always a suspicion that some of these policies get leaked ahead of time, try to pave the way for the policy coming in once it's announced. Seemingly at the moment there is a groundswell of opinion that some of the manifesto pledges really relating to the personal taxation, which was essentially promised it wouldn't get impacted. There's an increasing belief that somewhere in order to fill these fiscal holes that keep bubbling up, there will need to be a sort of reneging on some of those manifesto pledges. Politically, we'll have to see where that ends up through this election cycle. Clearly, the government's not very popular at the moment. But on the other hand, they are actually fairly popular with the gilt market, oddly enough. We've seen gilt yields come down, prices go up over the last couple of months, and it seems as though the reason for that is as much as the possible taxation is not popular on a personal level, and indeed, it doesn't necessarily sound like a pro-growth agenda, which would be sort of welcome in the long run, fixed income investors, gilt investors in particular, I suppose, what they're ultimately worried about. Is responsibility and their likelihood of getting paid. And all being equal, the fact that the government is worried about the fiscal rules, seems desperate to stick to them and is tying itself in knots in order to do that, that's actually been received positively by the gilt market.

It implies that they're taking that seriously indeed, which in many ways is a good news story when it comes to the UK. Finally, we've seen in the US in particular, but also perhaps in emerging markets too, a real return to form of this AI theme. We've seen lots of positive results come through. We've see lots of news flow in terms of investments and all the rest of it. We'll talk about that in a moment, but that's really driven up these AI names again. And if you just look to market returns, you'd sort of say, well, we're back to the races. There's really no change from that blip earlier in the year. AI remains the dominant driver of markets. The US remains the dominant drive of markets and this sort of concentration we'd seen over the last couple of years really is back in full flow. It seems a little bit different now though, however, because as much as the market outcome is still very solidly in the AI camp, there is a sort of a different tone of the reportage around it. A year ago, a couple of years ago, it was very hard to find anybody that was painted a cautious picture with respect to this theme. That seems to not be the case today. You've seen increasing concern around the concentration in the US, increasing concern around the valuations. And in the UK, for example, we've got data, we've got research that looks at social media searches. And the most commonly searched for investment-related social media term at the moment is 'stock market bubble'. So you know, there is a change of tone in sentiment out there. It's not a sort a big move yet, clearly, because these stocks are going up. But the interesting thing about bubbles, of course, is there's a lot of sentiment that has to be baked in on the way up. And you can think of it almost like the scales, the balances you'd have had in your science class at school. At the moment, the weight of opinion, certainly the money-weighted opinion out there is still pro these stocks. We're seeing that in terms of their marginal moves. If the marginal view changes, regardless of whether you think it's in a bubble or not, you know, if the consensus changes to it being in a bubble, you'll see the market react to it. So, you know, sentiment remains absolutely key when it comes to AI and these expensive but brilliant tech names in the US.

What's caused this?

James [00:09:07] Well, if you're positive on the AI theme, there's lots of reasons to be cheerful in terms of the news flow out there, continued investment in capacity. Going forward several years, out to 2030 and beyond, the scale of these investments is gigantic. It's in the billions and billions of dollars. On a regular basis, you're getting reports of new planned investment in this space. The interesting angle in some ways is not the availability of processing capacity which you know can be built up, it's actually the energy that's going to be needed to supply it. There's a secondary and tertiary effects which really need to get going in terms of supplying energy to allow this all to happen. Good news in terms of Apple. There was a headline in October, Apple joined the four trillion dollar market capitalisation club, a club of three at the time, we had Microsoft, NVIDIA, and then Apple joining it. It went back to being a little group of two though, only a few days later, as NVIDIA went into the $5 trillion market capitalisation club, pulling it out into a league of its own once more. These are clearly extraordinary scale. There's lots of reason to argue that it's justified in terms of activity, in terms a future demand of AI, but at the same time it's driven again, this concentration of the US, it's pulling in very tightly around only a handful of massive names. And some of these names are at valuations that from a historical perspective, if you look at it from a purely objective perspective, they do look expensive in terms of long-term stock market history. So that's the sort of balance we have in the US. Back to the races in terms the AI theme. Welcome in terms of the returns it's provided for investors but at the same time it's not been the sort of universally loved run-up in these stocks that it would have been 12 months or longer ago.

What's the impact for investors?

So the impact for investors over the short run, at least, has been very good. We've seen year to date a broadening of market leadership. UK returning about 17.5% in sterling terms to the end of October. Europe up about 20. Emerging markets, Asia up a sort a similar amount. So there's actually a number of different markets doing well over this year's date to end of October period. And in fact, still in that period, the US remains a bit of a laggard, particularly in sterling terms. Over the shorter term, the sort of September's, October's into November's, it really is a return to form of AI, a return form of the US. And you can see actually, if you didn't know the context in terms of the news flow around it, you would think, well, we're just sort of back to the return on the growth theme where growth is outperforming value, large cap is out performing small cap, the US is doing well against most of the developed market. But one of the interesting differences over this period is that Asian emerging markets are outperform the US whereas previous years we've seen certainly the US really going it alone. It's got running mates earlier in the start of the year. It had running mates in the form of developed markets actually outperforming the US over that period and in this latest sort of couple of months US continues to do pretty well but Asian emerging markets are outperform that.

What have we done about it?

Lots of detail to come. There's lots of dynamics changing underneath the surface of markets that give us plenty to discuss when we do our tactical round in the coming days. That's it from me. Have a good weekend when you get there, and we'll see you next time.