The world is in the midst of an oil crisis. The war in Iran has thrown the markets into turmoil, with the price of oil soaring to around $100 a barrel.

The oil shock has repercussions that are far wider than just the price of petrol. In this episode of MoneyWeek Talks, editors Kalpana Fitzpatrick, Andrew Van Sickle, and Cris Sholto Heaton make sense of what is happening now, explain where the crisis could go next, and what you should do to protect your portfolio. Tune in now on YouTube or on most podcast platforms.

About the podcast

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

What force will shape the world in the next 20 years? The answer is China's drive to financialise, according to Diana Choyleva, founder and chief economist at Enodo Economics.

In this episode of the podcast, Diana speaks to MoneyWeek's Cris Sholto Heaton about how the AI race differs in China versus the West, the transformation of the country's equity market, and the breakdown of globalisation.

You can watch this episode on our YouTube channel or subscribe to it on any podcast platform.

About the podcast

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

Hedge funds that focus on picking stocks have had a fantastic start to the year. So-called long-short equity hedge funds returned around 6.7% for the year to 14 April, before the rally in equity markets that took place on news of the ceasefire in the Middle East, according to a report compiled by Goldman Sachs. The MSCI World index gained 4.3% for and the S&P 500 3.9%.

Long-short equity hedge funds try to beat the market by taking long positions in their favourite firms and going short or betting against the companies they believe are overvalued. This is just one part of the $5.2 trillion hedge-fund sector. Because they are aimed at high-net-worth and professional investors, hedge funds can invest wherever they want and in whatever they wish to, as long as they have their investors' permission. The Andurand Commodities Discretionary Enhanced fund, for example, an energy-focused hedge fund managed by legendary oil trader Pierre Andurand, returned 31% in the first quarter of 2026, driven by bullish bets on oil markets (although it went on to lose 51% in April). Another fund, Point72 Asset Management, is what is known as a “multi-strategy” hedge fund, and trades everything from oil to interest rates, currencies and equities to earn a return. It ended March up nearly 4% despite the volatility in global markets.

The global hedge-fund industry attracted $89.3 billion in new capital over the six months to the end of March, the highest two-quarter period of inflows since 2007. “Macro” funds have been particularly popular with investors, according to the latest HFR Global Hedge Fund Industry report. These funds seek to profit from movements in financial markets driven by political or economic events and invest across all asset classes, using leverage to boost returns. Major macro firms include Bridgewater Associates, Brevan Howard, Caxton Associates and Rokos. HFR's benchmark index for these funds, the HFRI Macro (Total), returned 4.9% in the first quarter, outperforming the MSCI World index by 8.5%. Meanwhile, HFRI's fixed-income index, the HFRI Relative Value (Total), added 1.4% in the quarter, around 2.6% better than the -1.2% return for the BofA Global Broad Market Corporate bond index and 3.3% more than a broad index of UK gilts.

Hedge funds are not as exotic as they look

These returns illustrate the key reason to hold hedge funds in a portfolio: they can help fund managers and investors to reduce volatility by gaining exposure to assets they may not have the expertise or resources to trade themselves. However, most hedge funds require a minimum investment of around £100,000. Some won't talk to you unless you're willing to put up millions. What's more, to make the most of these vehicles investors tend to hold a portfolio of funds, each with a different focus. So, adequately to take advantage of the sector, investors need several million pounds. That's why the hedge funds tend to be off-limits to all but the wealthiest individual investors.

That said, UK investors do have some options. There are a number of hedge fund structured as investment trusts, as well as one publicly listed hedge fund based in London and traded on the London Stock Exchange.

In our globally interconnected financial markets, there are also options on other exchanges around the world that could be worth considering for those seeking to diversify their portfolios.

Hedge funds are often portrayed as exotic and complex, but in reality, they are very similar to the funds available to the average retail investor. A hedge fund is simply a fund formed by a group of private investors with the aim of generating a return on their investment over a set period. They often seek to achieve a positive absolute return, rather than outperform a benchmark – that is, they seek to achieve a positive return regardless of whether the broader market is rising or falling.

However, because hedge funds tend to focus on high-net-worth investors and institutions (such as pension funds), the regulations governing them are much more flexible. It's assumed that the institutions and wealthy individuals who decide to invest in hedge funds have the skills to evaluate the proposition themselves, so hedge-fund managers have much more flexibility around where they can invest and how they can invest.

There's also no obligation for hedge-fund managers to report what they hold and why they hold it. Some managers may decide to own just a handful of different assets and update investors once a year. Others may hold thousands of different investments, with teams of traders buying and selling positions every minute. Hedge funds also tend to have higher fees than the active funds available to the mass market. It's common for managers to adopt a “two and 20” structure, with a management fee of 2% a year and a performance fee of 20% of any profit, although managers will offer better terms for more important customers. While the additional fees do undoubtedly have an impact on returns over time, it ensures the managers, who often own a big stake in the fund themselves, have a strong incentive to achieve the best returns, and this level of incentive structure is something you don't usually see with active funds aimed at the mass market.

Hedge funds also frequently restrict their investors from withdrawing money. This can be helpful when using esoteric or illiquid investment strategies and managers don't want to have to deal with a large number of redemption requests in any particular period, which may force them to sell assets at a bad time. In this respect, hedge funds have a lot in common with investment trusts. Investment trusts have a fixed capital base; hedge funds can lock in their capital for a period. Some funds will require investors to commit for five years when they make an initial investment. Others may require them to submit redemption requests quarterly rather than daily. They also often reserve the right to “gate” withdrawals, or prevent investors from accessing their cash if the manager believes doing so would have a detrimental impact on investment returns.

Just like investment trusts, hedge funds can and do use leverage, or borrowed money, to enhance returns. However, this has led to disastrous outcomes in the past, when managers have borrowed too much, too quickly. One of the most notable recent examples was Bill Hwang's Archegos Capital, which imploded after borrowing $160 billion against just $20 billion in capital. The funds collapse wiped out Hwang's $20bn net worth overnight and ultimately led to the collapse of global investment bank Credit Suisse. In another example, in the first quarter of 2021, Melvin Capital, run by Gabe Plotkin, lost about $4.5 billion, or 49% of its assets, in a few weeks, betting against GameStop using borrowed funds. The fund survived only after receiving a $2.5 billion bailout, although it closed for good a year later.

Hedge fund managers are only human

Hedge funds have attracted plenty of criticism over the years, mainly on the issue of fees. A study published in February 2020, “A Bias-Free Assessment Of The Hedge Fund Industry”, found that between 2013 and 2019 hedge-fund managers created up to $600 billion in value added, before fees. Net of fees, the figure was significantly lower. In fact, one study of 22 years' worth of hedge fund data, also published in 2020 (“The Performance Of Hedge Fund Performance Fees”), found that fees consumed 64% of the gross returns on investors' capital over the long run.

Hedge-fund managers would, of course, argue that they deserve higher fees because they outperform the market. And that is true to a certain extent. But they are also only human. Another study published in May 2011, “Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn”, found that although a hedge-fund portfolio's buy-and-hold return between 1980 and 2008 came in at 12.6%, higher than the S&P 500's total return of 10.9% over the same period, the dollar-weighted annual return, accounting for investors' inflows and outflows, was just 6% a year. This shows that, although most hedge-fund investors are far richer than the average investor, they're still subject to psychological biases. Indeed, Morningstar's latest Mind the Gap report revealed that the average investor lost 1.2 percentage points annually over the past decade due to poor timing of purchases and sales. Multiple studies have reached the same conclusion.

Focusing on this performance in isolation misses the point, however. Hedge funds and alternative strategies should only be used as part of a portfolio to provide diversification and help smooth long-term returns. Hedge fund Universa Investments is one of the best examples of what a hedge fund or alternative strategy can provide. Universa specialises in risk mitigation against “black swan” events – that is, unpredictable and high-impact drivers of market volatility. To this end, it employs a bespoke combination of credit-default swaps (a form of credit insurance on corporate debt), stock options and other derivatives to bet on market movements. The fund is highly secretive, but Universa reportedly manages $20 billion and posted a 100% return on capital when Donald Trump unveiled his sweeping tariffs last April. It reportedly earned 4,000% in March 2020 when the pandemic broke out.

Universa is far from the only fund that has used this approach to make enormous profits. Bill Ackman's Pershing Square hedge fund earned $2.6 billion during the pandemic after paying $26 million to acquire a portfolio of credit-default swaps, which then soared in value by more than 10,000%. These trades don't come around very often, which is why it can pay to have a manager focused on finding opportunities.

Wealthy individuals and companies that invest in hedge funds will do so as part of a broadly diversified portfolio. This helps reduce the risk of volatility, erosion of returns by fees and any individual hedge-fund blow-up. Insurers typically allocate between 3% and 10% of their funds to hedge funds and other alternative assets, while public pension funds allocate up to 12% on average, according to figures compiled by Goldman Sachs and the French bank BNP Paribas. University endowments can take larger positions, primarily because they have a much longer-term focus.

Endowments allocate 15%-40% of their assets on average to long-short, event-driven and emerging-market hedge funds. Family offices, which can also take a longer-term view, also tend to have a higher allocation, although typically capped at around 25% on average, according to research.

One of the world's most active hedge-fund investors is the Canada Pension Plan Investment Board (CPPIB). This $714 billion fund has been investing in and backing new hedge-fund managers for years and it's accumulated a $76 billion portfolio of internally and externally managed funds. According to the fund's 2025 annual report, its strategies have delivered $15.6 billion above its benchmark in net added value over the past five years, mainly due to external fund allocations.

Hedge funds for the average investor to buy

While most hedge funds are off-limits to the average investor, the UK is actually uniquely positioned in having a number of publicly traded hedge funds available for individuals to buy and sell on the London Stock Exchange. Two of these are in the FTSE 100: Pershing Square Holdings (LSE: PSH), and the world's largest publicly traded hedge fund, Man Group (LSE: EMG).

Pershing Square was listed in London in 2017 and is run by Pershing Square Capital Management, founded in 2004 by Bill Ackman. It's not an exact copy of the parent firm's fund, but rather a selection of the best ideas. The fund aims to hold eight to 12 core holdings (although a total of 15 holdings are currently listed), bundled up within an investment-trust structure. That means it's available to smaller investors and has the added benefit of an independent board of directors that provides oversight and ensures their representation. The trust has a typical hedge-fund fee structure, with an annual management fee of 1.5% and a performance fee of 16%. Management would argue that the returns have more than justified the high fees. Since its inception in 2012, the fund has produced an annualised return in terms of net asset value of 11.8% compared with 6.5% for the FTSE 100 in US dollar terms. Holdings currently include Uber, Amazon, Google and Meta.

Man Group runs a range of investment products operating under a variety of investment strategies. Its main options come under its computer-driven trading arm AHL, and they've performed particularly well this year. In the three months to the end of March, its AHL Alpha fund added 5.7% and AHL Dimension returned 5.6%. Man Strategies 1783 notched up a 3.8% return. Thanks to this positive performance in a quarter defined by volatility, assets reached $228.7 billion in the three months through March, up from $227.6 billion at the end of 2025. Buying shares in Man Group won't give investors direct access to its underlying strategies, but will provide exposure to the firm's income stream. For the year to 24 April, shares in the hedge fund returned 11.6% and over the past five years produced a total annualised return of 13.8%.

Another London-based option for investors is BH Macro (LSE: BHMG). This investment trust has just one investment: units of the Brevan Howard Master Fund, one of the world's largest and most successful macro hedge funds. This trust is designed to provide investors with a strategy to diversify away from equity markets. Since the first half of 2007, there have been 20 significant market drawdowns where the US S&P 500 index has fallen by 5% or more. In 17 of these 20 periods, BH Macro's net asset value actually increased. In October 2008, for example, when the S&P 500 fell by more than 15%, the fund's net asset value rose by several percentage points. The fund, with its 150 portfolio managers and traders, has achieved an annualised return of 8.5% since inception, with less volatility than in broader equity markets.

Another option is Tetragon Financial (LSE: TFGS). This trust owns a portfolio of private businesses, hedge funds, credit, real estate and bank loans. Its net asset value has risen 612% since its inception in early 2007, nearly double the MSCI All Country World index. It charges a performance fee of 25% and an annual management fee of 1.5%.

Blackstone (NYSE: BX) is one of the world's largest publicly traded asset managers. It was founded in 1985 and started life as a private equity and mergers and acquisitions shop and has since expanded into real estate, private credit, fund management and even hedge funds. The $1 trillion asset manager is leading the charge in bringing hedge funds to high-net-worth individuals with the Blackstone Multi-Strategy Hedge Fund, known as BXHF, which plans to start trading this year. According to Bloomberg, the fund will invest about 30% of its assets in other hedge funds as well as make its own investments. It will charge a 1.25% management fee and take a cut of 12.5% of profits once it earns at least a 5% return. Blackstone could be one of the best ways to invest in the booming market for alternative assets, offering diversification across multiple sectors.

There are limited options for investing directly in hedge funds and hedge-fund managers, but investors can use a selection of investment trusts to build exposure to alternative assets and diversify their portfolio themselves. For example, BioPharma Credit (LSE: BPCR), an offshoot of Pharmakon Advisors, one of the world's largest specialist biotechnology funds, lends directly to biotechnology companies and yields 7.5%. The trust has a near-spotless lending record.

Elsewhere, the TwentyFour Income Fund (LSE: TFIF) and TwentyFour Select Monthly Income (LSE: SMIF) focus on trading collateralised loan obligations and mortgage-backed securities to generate a high single-digit annual dividend for investors. These funds are highly specialised vehicles, but can help diversify portfolios.

On the credit side, there's also CVC Income and Growth (LSE: CVCG). This investment trust is managed by the private-equity giant CVC and holds a portfolio of senior secured loans acquired for yield and value. Once again, the trust could provide investors with diversification during turbulent times.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Charles Jillings, co-fund manager of Utilico Emerging Markets Trust, discusses the outlook for emerging markets and the long-term investment opportunities in infrastructure and utilities.

In this episode of MoneyWeek Talks, Andrew Van Sickle speaks to Charles about how emerging economies are dealing with Donald Trump's tariffs, the after-effects of the war in Iran, and why countries like Brazil and the Philippines are overlooked markets.

About the podcast

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

Andrew Van Sickle: Healthcare is a broad term. Could you start by outlining what exactly is in the MSCI World Healthcare index, the benchmark for your fund?

Sven Borho is the co-founder and managing partner of OrbiMed, and portfolio manager of the Worldwide Healthcare Trust.

Sven Borho: It captures every single part of the industry. You have the big pharmaceutical groups; more innovative smaller-cap pharma and biotechnology firms; generic drugmakers; medical-device makers; and service providers. These are the big health-management organisations (HMOs) in the US (the health insurers) and private hospitals. The index is diversified across the US, Europe and Japan, although it doesn't capture healthcare in emerging markets.

Andrew Van Sickle: It's often said that “health is wealth”, and investors have traditionally been able to count on both structural growth and income in this sector. But the index has had a difficult decade. What has gone wrong?

Sven Borho: One problem is that the price of pharmaceuticals became a political football, creating years of uncertainty. Drug prices were a key theme in the presidential election between Hillary Clinton and Donald Trump. We got a form of drug-price controls under Joe Biden, and the regime was tightened when Donald Trump returned to power.

The other key headwind was the rise in interest rates over the past few years. That hampers growth stocks, such as smaller biotechs, as dearer money reduces the present value of future profits. The S&P Biotechnology Select Industry index went nowhere between mid-2015 and mid-2025. The S&P Health Care Select Sector index gained 60% over that period, compared with 300% for the S&P 500 or 400% for the Nasdaq.

Andrew Van Sickle: Is the drug-price threat receding now?

Sven Borho: Yes, the sector knows where it stands now, so the uncertainty discount has started to recede. Trump was irritated that US drug prices were higher than elsewhere. He has now cut a deal with the sector, whereby the government will pay lower prices for future drugs and for current ones being delivered to Medicaid and Medicare programmes. The deal is being done with most-favoured nation (MFN) pricing, whereby prices will match those offered to a basket of other developed countries.

Meanwhile, mergers and acquisitions (M&A) are on the rise as big companies try to compensate for major drugs going off patent. When a drug reaches that stage, prices collapse by 98% as generic competition takes its toll. Merck's Keytruda, for instance, a cancer drug with annual sales of $30 billion, goes off patent in 2028. Each of the Big Pharma companies will see a large product go off patent between 2025 and 2028. This coincides with the Trump government's pricing deal, so the sector is facing a double whammy.

History shows it is impossible to rectify a pipeline gap like this through internal research and development (R&D) alone. So the big names will go shopping, acquiring the right to develop a drug from smaller firms with promising products, or buying them outright.

Big Pharma wants products with annual sales potential of $3 billion and above. If you're a speciality pharma firm or a biotech with a drug boasting that kind of potential, you're on someone's shopping list. That is why 30% of our portfolio is in biotech companies, with a heavy focus on those most likely to be bought out. Overall, 12% of the portfolio comprises a “basket” of the stocks most likely to be bought out.

Andrew Van Sickle: Returning briefly to drug development, what proportion of drugs successfully move from discovery to approval?

Sven Borho: The percentage hasn't changed much over the years: one in ten make it from pre-clinical trials through to regulatory approval. This is the biggest bottleneck in the sector. One can't speed up the process, which takes ten, even 15 years. Patients need to be on a drug for a certain amount of time, for instance.

And costs have risen sharply. Traditionally, it would cost around $1 billion to bring a drug to market. These days, it's north of $2 billion. Getting one person enrolled in a clinical trial can cost $300,000. Compliance and regulatory requirements, along with the general inflation trend, have driven up expenses.

Andrew Van Sickle: What effect could AI have on the sector?

Sven Borho: It is likely to help us come up with more compounds to test, but that will just add more potential treatments to the bottleneck building up before the clinical testing process. It is in the areas of diagnosis and treatment of disease that AI will be transformative. Given how it can amalgamate data – including your blood tests and MRI scans, say – and compare new information to it, it should become far better than a GP at diagnosing and treating disease. It may not be too long before people don't see a GP at all.

This should massively reduce costs – as should robots performing surgery. I think manual surgery will be a thing of the past in the not-too-distant future. Already today, you could have a physician operating in London on a patient in New York with a medical robot. One of our favourite companies, therefore, is Intuitive Surgical, which manufactures robotic surgeons.

AI should allow us to get a grip on healthcare expenditure; 12% of total healthcare spending (which in the US comprises a fifth of GDP) is on drugs, a proportion that hasn't changed over the years. Hospitals, surgeries, GPs and so on account for the rest. There should now be deflation in that 88%, counteracting the expense of the ageing of the population.

Andrew Van Sickle: What impact will weight-loss drugs have?

Sven Borho: People tend to think of the cosmetic element, and of course that spurred early adoption, but the big story is the impact on chronic diseases linked to excess weight, notably the big ones: cardiovascular disease, cancer and diabetes. Data suggests these treatments cut your chance of contracting Type-2 diabetes by 80%.

There are spillover effects in other areas – sleep apnea, for instance, or hip and knee surgeries, the odds of which dwindle if you are walking around with 20% less body weight. The next stage of the boom will be increasingly common oral treatments rather than injectables, with Eli Lilly the leader in the subsector. Weight-loss is a thriving division for other big names, but for me the most interesting way to play weight-loss drugs is Structure Therapeutics.

It focuses on oral treatments for obesity and related diseases. It has an oral obesity treatment about to enter phase III (the final stage of clinical trials) and it is second only to Eli Lilly's. It should hit the market a year after the pharma giant's treatment (which is supposed to arrive this month). The group will probably be acquired. Weight-loss treatments will be the largest drug category for years to come.

Andrew Van Sickle: Tell us about your fund and its top-three holdings?

Sven Borho: We launched it in 1995; I have been in the sector for 35 years. The trusts's net asset value (NAV) enjoyed a compound annual return of 13.5% from the fund's inception until the late spring of 2025, eclipsing the benchmark index's 11.3%. The secret to our success is an enduring focus on innovation – the highest-growth companies. We've always been agnostic about where those companies are, so we are widely geographically diversified. Our overweight position in biotechnology compared with the benchmark again highlights the concentration on innovation.

Eli Lilly, AstraZeneca and Boston Scientific are the top-three beyond our M&A basket. The last is one of the fastest-growing and best-managed medical-devices firms, a long-term compounder with 15% yearly growth in earnings per share. Eli Lilly is a bet on the weight-loss theme. AstraZeneca is the second-fastest growing pharma group in the world, mostly driven by oncology. We like to identify the fast growers, even in the large-cap segment. Intuitive Surgical and Boston Scientific are the fastest-growing medical-technology firms.

It's worth highlighting our holding in China's Jiangsu Hengrui Pharmaceuticals too. It's worth 5% of the portfolio and provides access to the extraordinary innovation in the Chinese pharma sector. Jiangsu has an R&D pipeline of approximately 150 projects, the second-largest in the world after Pfizer's 156. They have a competitive compound in practically every area.

What's more, going from the pre-clinical stage of the pipeline to phase one or two data (the stage at which you receive the first efficacy data in human clinical trials) takes them a third as long as Western companies and costs them 90% less. The scientists doing the work are just as qualified as in the West; many will have done their PhD or worked in a biotech here. Costs of R&D are much lower in China, as is the regulatory burden, especially when it comes to early stage trials.

Once they get to phase three of clinical trials, however, it gets trickier. A Chinese firm can't do those trials in Western markets. It has to licence the drug out to Western counterparts. The US regulator, the Food and Drug Administration, doesn't trust Chinese data, while there are also political sensitivities surrounding the process. As a result, Western firms' heads of R&D go to China to or three times a year to discuss such deals, which can be massive.

That is a transformative theme. At the epicentre is Jiangsu Hengrui. It is the Chinese biopharmaceutical equivalent of Nvidia. It is the biggest innovator. I mentioned that Jiangsu's number of R&D projects in clinical trials is second to Pfizer's, but if you include pre-clinical projects, it has the world's largest pipeline. I think it has another 500 projects. And the quality of its compounds is absolutely first-class.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Fund inflows are on the rise but investors remain cautious and are seeking value, industry data shows.

Investors have had a tough time navigating financial markets in recent months with concerns about Autumn Budget tax rises as well as speculation about an AI bubble.

This uncertainty meant investors were cagey about putting too much money into funds for much of the second half of 2025 but there appears to have been a turnaround in November.

Investors placed £530 million into funds in November, the strongest month since May 2025, new figures from the Investment Association (IA) show.

The inflows coincided with the 2025 Autumn Budget but are a marked improvement on 2024’s fiscal update, which saw substantial outflows of £5.7 billion during October.

This suggests concerns around potential tax changes including restrictions to pension tax free lump sums that never materialised in the Budget had subsided, the IA claims.

But investors still appear cautious, with consistent outflows across equities, as withdrawals totalled £2.9 billion, while money market and fixed income funds remain in favour.

Domestically, funds investing in UK equities recorded the smallest outflows since May 2025 at £453 million against the backdrop of the FTSE 100 Index closing 2025 at record highs.

Tracker funds saw relatively low inflows of £233 million, while active funds recorded their highest inflow in six months at £297 million.

Miranda Seath, director, market insight and fund sectors at the IA, said: “November’s data signals a notable shift in investor sentiment, with funds returning to inflows for the first time in six months, as anticipation ahead of the Autumn Budget helped investors to piece together the likely tax changes ahead of November 26th.

Here is where investors are putting their money.

The most popular fund sectors

Money market funds saw inflows of £1.4 billion during November 2025.

The Short Term Money Market sector was the best-selling IA sector in November with inflows of £1.3 billion.

Seath suggested that the high inflow to short-term money market funds reflected expectations from retail investors that the cash ISA limit would be reduced.

Mixed asset funds also attracted £659 million in November, their biggest monthly inflow since April 2025.

Equity funds remain in the red, but UK outflows slow

Equity outflows slowed in November to £2.9 billion, according to the IA’s data.

The figure is down from outflows of £5 billion in October 2025.

However, all regions continued to record outflows from equity funds.

Investors took £943 million out of global funds and £640 million from North America, reflecting concerns about artificial intelligence (AI) and technology stock valuations.

This is still an improvement on October’s data though when outflows from global and North America funds reached £2.4 billion and £859 million respectively.

Continuing uncertainty over US trade tariffs saw £401 million of outflows from Asia-focused funds, but sentiment towards UK equities showed signs of stabilisation.

The IA figures show the region recorded its smallest outflows since May at £453 million.

The IA said: “This stands out against a backdrop of persistent risk-off behaviour and ongoing outflows from global equities, suggesting that investors may be reassessing the UK market’s prospects and reflect a growing recognition among retail investors of the UK’s value proposition."

It comes as the FTSE 100 closed 2025 with a 26% gain.

In contrast, the S&P 500 returned 10% in sterling terms over 2025, which may be helping to draw investor attention to UK equities.

The IA said: “The FTSE’s strong performance appears to have positioned the UK as an increasingly attractive alternative to the US, particularly as concerns mount over valuation bubbles and concentration risk in major American technology firms.

“UK stocks are seen as good value with more room to grow, in contrast to some US market stocks where valuations are very high, leading to concerns about an AI-driven bubble and a US market correction. Investing in the UK is also a good way of diversifying away from the US and managing equity risk in portfolios and UK investors may be waking up to this after favouring European stocks earlier in the year.”

Diversification for fixed income sectors

Investors returned to fixed income in November 2025 with inflows of £1.1 billion compared with outflows of £62 million a month before.

Inflows were led by £360 million going into the Mixed Bond sector, £262 million into Strategic Bond and £117 million into UK Gilts.

Outflows from government bonds also eased to £11 million, the IA said.

The Global Emerging Market Bond sector also marked its seventh consecutive month of inflows, attracting £100 million in November.

The IA said this suggests investors are looking to diversify beyond traditional developed markets and reflects a drive to diversify away from US dollar assets.

The trade body added: “This resurgence reflects a growing appetite for diversification across the asset class, as retail investors sought to balance risk across a range of fixed income sectors.”

Seath said: “As we enter the new year, 2026 has so far been marked by the US deposition of Nicolas Maduro in Venezuela, a country with significant oil reserves.

“Even as immediate market reactions, particularly in oil, have been relatively contained, in this environment of growing uncertainty over the geopolitical ramifications of the US’ actions, households and savers are likely to continue favouring‑ a cautious approach. Diversified allocations over the long-term can look through near-term volatility as market and political dynamics evolve.”

Did you buy shares in Legal & General, Rolls-Royce or Nvidia this year?

If so, you were in good company. According to analysis from AJ Bell, these were the three top stock picks for DIY investors throughout the whole of 2025 (from 1 January to 2 December) based on net flows through its DIY investor platform.

While hot-button themes such as defence and artificial intelligence (AI) caught investors’ attention, the reliable income of dividend stocks also appealed throughout an unpredictable year for the markets.

Legal & General (LON:LGEN) – the highest-yielding stock in the FTSE 100, with a dividend yield of 8.6% as of 8 December – was the most popular stock among DIY investors on AJ Bell throughout 2025.

“Sectors come in and out of fashion, but income stocks tend to rank highly on investors’ shopping lists every single year. The UK stock market is a rich hunting ground for dividend payers,” said Dan Coatsworth, head of markets at AJ Bell.

On the other hand, some investors took a more futuristic perspective and invested in stocks that will power the technology of the future.

Three quantum computing companies – IONQ (NYSE:IONQ), Rigetti Computing (NASDAQ:RGTI) and D-Wave Quantum (NYSE:QBTS) – were among the ten stocks that saw the greatest percentage change in the number of eToro's UK investors holding them over the course of 2025.

“The outlook improved for the quantum computing sector in 2025,” said Lale Akoner, global market strategist at eToro. “While the sector is still high-risk and long dated, contract wins such as Rigetti’s which announced landmark purchase orders, including a $5.8 million contract with the US Air Force, helped anchor valuations in the sector.”

Akoner added that “fundamentals, rather than hype, are starting to drive performance” in the quantum sector, which was adding to retail investor interest.

As you decide where to invest for 2026, take a look back on the top stocks of 2025.

The most popular UK stocks of 2025

While L&G took top spot, there was a mix of themes and sectors in the top UK stocks of 2025.

These included defence stocks like second-place Rolls-Royce (LON:RR.) and fifth-placed BAE Systems (LON:BA.) as well as financial stocks like Aviva (LON:AV.), HSBC (LON:HSBA), M&G (LON:MNG) and Phoenix Group (LON:PHNX).

^{Based on £ net flows on AJ Bell’s DIY investor platform from 1 Jan 2025 to 2 Dec 2025}

“AJ Bell customers showed a strong preference for UK shares, the opposite to many other investors given Investment Association figures show steady net outflows from UK equity funds during the year,” said Coatsworth.

Of AJ Bell’s ten most popular stocks across all markets in 2025, seven were UK-listed.

Read more on the best- and worst-performing FTSE 100 stocks of the year in our explainer.

The most popular US stocks of 2025

Given stretched valuations and unpredictable policy moves, 2025 saw a tendency for investors to take money out of US markets for much of the year, though in early December the S&P 500 appeared to have overtaken the FTSE 100’s returns for the year.

Unsurprisingly, AI stocks dominate the most-bought US-listed stocks.

Every Magnificent Seven stock besides Apple made the top ten most-bought US stocks on AJ Bell this year, with Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) taking the two top spots.

^{Based on £ net flows on AJ Bell’s DIY investor platform from 1 Jan 2025 to 2 Dec 2025}

“When something as big as AI is splashed all over the news, discussed constantly in the workplace, and embedded into devices like phones and laptops, it’s no wonder that people think there is money to be made,” said Coatsworth.

Which stocks were the most widely-held at the end of 2025?

Besides quantum computing companies, data on the stocks held by eToro’s UK users showed a big increase in European defence stocks, particularly Germany’s largest defence firm Rheinmetall (Frankfurt:RHM) which saw a 334% increase in the number of investors holding the stock on eToro last year.

“The combination of clearer policy direction, and multiyear spending programs have improved earnings visibility for the sector,” said eToro’s Akoner. “Companies like Rheinmetall and BAE Systems have benefited from lucrative, multi-year contracts, reducing cyclicality and supporting the investment case for long-term investors.”

^{Source: eToro}

The knock-on effect of this in terms of the most-held stocks across eToro users was that Rolls-Royce moved one-place up the list.

^{Source: eToro}

While Apple and Nvidia also climbed one place, the companies that made up the top ten most-held stocks list were the same at the end of 2025 as at the end of 2024.

Canada’s stocks have enjoyed a revival this year. The S&P/TSX Composite index has gained 25%, eclipsing America’s S&P 500, up just 16%. Canada has been one of 2025’s best-performing developed markets, an early sign that the post-globalisation era will reward a very different set of winners.

With economies reshoring and supply chains shortening, the natural lottery of geography and geology has never mattered more. Few nations have hit the jackpot quite like Canada, which ranks among the world’s top-five energy producers and sits atop $1.7 trillion of natural-resource wealth from oil, gas and uranium to potash, gold and timber.

Crucially, Canada pairs this abundance with political stability and alignment with the West, which is a rare combination in a world of rising authoritarianism. As Washington turns inward, Canada’s calmer politics, under the steady hand of prime minister Mark Carney, could become a safe haven for investors seeking exposure to the decade’s defining themes without populist noise.

Canadian stocks for your portfolio

Canada’s most strategic energy resource may be uranium. As the world’s second-largest producer, it stands to gain as nuclear power returns to the global electricity mix. Governments are extending reactors’ lifespans, new builds are back on the agenda, and even the Magnificent Seven are investing in nuclear projects to power AI data centres’ colossal energy needs – demand that could require 50 new reactors by 2030.

After years of supply cuts following the disaster at Fukushima and the West’s retreat from dependence on Russian energy, markets are turning to reliable producers such as Canada. At the heart of this revival sits Cameco (Toronto: CCO), one of the world’s largest and most cost-efficient uranium miners. In partnership with Brookfield and Westinghouse Electric, it plays a central role in supplying Western markets. The shares look promising as miners scramble to restore supply after a decade-long glut. The infrastructure sector has benefited from nearshoring, electrification and decarbonisation. The $1.2 trillion US Bipartisan Infrastructure Investment and Jobs Act alone is funding more than 66,000 projects, while Carney’s industrial strategy aims to channel billions into Canadian clean energy, advanced manufacturing and critical minerals.

Stantec (Toronto: STN), a global leader in sustainable design and engineering, is a clear beneficiary. Its diversified footprint across energy, water and transport positions it perfectly for North America’s rebuilding cycle. A focus on efficiency has delivered industry-leading profit margins, while exposure to US and Canadian infrastructure spending bodes well for growth.

Canada’s answer to Nvidia

Technology is a further major driver of the portfolio. We first bought Nvidia in 2016 at an average price of around $1.35 and have benefited from its meteoric rise ever since. But we have found the next wave of opportunities closer to home.

Celestica makes high-speed components to expand global data centres. With Nvidia, OpenAI and Oracle investing hundreds of billions of pounds in new AI computing power, Celestica sits in the middle of the supply chain. With Celestica’s sales from AI-related hardware surging 80% last quarter, we can access all the disruption of Silicon Valley at a Canadian discount to heady US tech valuations.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Investing seems complex when you first start, but picking the right investment funds for beginners can make it much more straightforward, and give you an easy on-ramp to building your wealth over the long term.

So if you’re wondering how to begin investing, picking out one or two top funds could be a great place to start.

“Investing is a measured and long-term process,” says Rob Morgan, chief investment analyst at Charles Stanley. “It involves taking risk but doing so in a way that minimises and mitigates it, to more reliably harness the growth available across global economies and individual companies.”

Investment funds are a particularly good option for beginners because they offer a convenient way to manage the level of risk you’re taking. Investing in a fund spreads your money, and therefore your risk, across dozens of different companies.

There are funds for almost any type of investment, from sustainable funds that can grow your wealth while making a positive impact, to AI funds that track the world’s most cutting-edge technology.

Investment funds explained for beginners

There are several types of funds, including:

• Open-ended funds;
• Closed-ended funds (or, more commonly, ‘investment trusts’);
• Exchange-traded funds (ETFs).

Each has its advantages and disadvantages. But the simplest and most relevant for beginner investors are ETFs.

An ETF is a fund that trades as a single share on a stock exchange. Its price changes while stock markets are open in line with changes in the price of the assets it tracks. You can buy and sell it in a stocks and shares ISA, just as if it was a stock.

There are ETFs for almost everything, but beginners might be particularly interested in ETF index funds. These track a specific index, such as the UK’s FTSE 100 or the US’s S&P 500.

“If you’re not sure which companies you wish to own, you may want to consider a tracker fund, or an ETF,” says Claire Exley, head of advice and guidance at J.P. Morgan Personal Investing. “These will allow you to hold a small amount of, for example, every company listed in the FTSE 100.”

Index funds are usually low-cost: because they just track an index, there’s not much to pay by way of management fees.

Best of all, they usually outperform more active stock-picking strategies. AJ Bell’s December 2025 Manager versus Machine report found that only 20% of actively-managed funds (IE, those where the manager decides when to buy and sell stocks, rather than just tracking an index) outperformed a passive alternative over the last five years.

Three types of investment funds for beginners to consider

If you are drawing up a shortlist of the first funds to add to your investment portfolio, investment platform AJ Bell breaks the available fund universe down into three categories in terms of the kinds of investments they make.

Global equity tracker funds

Funds that track the global stock market are a great way to get started in investing without having to decide on any specific region or industry.

“These funds provide low-cost exposure to companies around the world, with representation from a wide range of sectors,” said Dan Coatsworth, head of markets at AJ Bell.

Four of the best-known global equities (another word for ‘stocks’) indices are MSCI World, MSCI All Country World, FTSE World and FTSE Developed World. Tracker funds following these indices should register the same price movements (or very close to them) over any given timeframe.

Some of the most popular global stock tracker funds on AJ Bell’s platform are:

Source: AJ Bell, based on net flows from 13 April 2025 to 12 April 2026

Global bond tracker funds

If you’re looking for a more cautious approach to getting started in investment funds, you could look at bond funds instead.

“When shares fall, bonds often fall less and recover faster, helping to smooth the overall investment journey,” said Coatsworth. “That might suit someone in their 40s or early 50s approaching retirement, those already in retirement, or more anxious individuals.”

There are typically three types of bond that bond funds invest in – corporate bonds, government bonds (such as gilts) or a combination of the two (these are known as strategic bond funds).

Some popular bond funds for beginner investors on AJ Bell are:

Source: AJ Bell, based on net flows from 13 April 2025 to 12 April 2026.

Multi-asset funds

Most portfolios combine bonds and equities, as well as other types of asset. You can do this yourself by buying funds specialising in different investments, but a more convenient approach is to buy a multi-asset fund which acts as a self-contained portfolio in its own right.

“The more cautious you are, the greater the proportion you might want in bonds,” said Coatsworth. “However, there’s such a thing as being too cautious. Those with time to ride out the ups and downs of the stock market might want to avoid having too much in bonds as a proportion of their overall portfolio given the returns might be much lower than a more equity-weighted portfolio.”

Six funds for beginners

With input from Charles Stanley’s Morgan, we’ve picked out six investment funds for beginners, which we’ve shared below.

Fidelity Index World

Risk level: medium-high

A low-cost, cheap tracker fund is a great starting point to gain exposure to a market or sector, giving you convenient ownership of all or most of the companies that make up that market’s index.

Fidelity Index World is a good fund for beginners to consider because it provides a convenient tracker for the global stock market.

Personal Assets Trust

Risk level: medium-low

Personal Assets Trust (LON:PNL) is a multi-asset investment trust that sets out primarily to avoid losing money in inflation-adjusted terms (making it a less risky investment compared to funds that are more concerned with growing wealth than preserving it).

The portfolio comprises four main asset types: equities, bonds, cash and gold.

This has proved a resilient combination. The returns from each of these asset classes tend to rise and fall independently of one another, meaning that it can hold up even in changing market conditions.

Vanguard LifeStrategy Funds

Risk level: variable

The advantage of this multi-asset fund range is that it has several different funds, each with a different risk profile, so investors can select the one that best suits them.

Interactive Investor includes three in its quick-start fund range for beginner investors: 20% Equity, 60% Equity and 80% Equity, though the full range also includes 40% and 100% equity options. The remainder of the portfolio is invested in bonds.

As a rule of thumb, the higher the percentage of equities, the higher the risk profile, and the higher the potential returns.

Royal London Short Term Money Market Fund

Risk level: low

Money market funds invest your money as if it was cash, but they tend to generate returns just above the Bank of England base rate.

Interactive Investor includes Royal London’s Short Term Money Market Fund in its quick-start range, and characterises it as very low risk. This is a very cautious option: your investment is very unlikely to fall in value with a money market fund, but it’s also unlikely to grow much beyond inflation.

M&G Global Dividend

Risk level: medium-high

Dividends are the payments that companies make to their shareholders. Ultimately, it is dividend payments – or the expectation of future dividend payments – that gives shares their value.

M&G Global Dividend harnesses the power of dividend stocks, with a global perspective. It holds a wide variety of companies and could be of particular interest to investors seeking a rising income from their investments.

Scottish Mortgage

Risk level: high

Scottish Mortgage (LON:SMT) is one of the best-known investment trusts for innovation-led growth investing.

Morgan believes that anyone taking a long-term approach to investing should consider investing in a fund that looks for long-term growth through technological innovation. Their long-term perspective ought to let them ride out short-term volatility and reap the long-term rewards.

Scottish Mortgage invests in private companies like Elon Musk’s SpaceX or TikTok owner ByteDance, as well as those listed on global stock markets, offering opportunities that are otherwise hard for beginner investors to access.

With the spring holiday season approaching, investors may be wondering: is the stock market open on Easter? The answer to this question is: no. The UK stock market will be closed on Monday, 6 April, for Easter Monday.

The stock market is also closed on Friday, 3 April, to observe Good Friday.

Typically, UK stock market opening times are 8am to 4.30pm Monday to Friday with a small break between 12pm and 12.02pm. This can vary depending on public holidays and major events, such as Christmas Eve, when markets close earlier than usual.

Investors gearing up for the end of the tax year will need to make sure they’re ready for the big money changes in April.

But with markets getting unpredictable due to the ongoing war in Iran, investors may want to prepare their portfolio for high inflation. Check out our weekly share tips guide to get an idea of where to invest.

Below, we look at UK and US stock market opening times during Easter, and how it will impact trading on those days.

Is the stock market open on Easter?

No. The UK stock market is closed on Easter, which falls on Monday, 6 April. This is part of the eight standard holidays observed by the stock exchange in the year.

The London Stock Exchange only observes English bank holidays – not Scottish, Welsh or Northern Irish holidays. For instance, Easter Monday is a bank holiday in England, Wales and Northern Ireland but not in Scotland. It’s a non-trading day for the stock market.

The UK stock market is also shut on Friday, 3 April, for Good Friday, which means the trading will cease for four consecutive days.

We look at the key money dates for 2026 for those who want to stay on top of their finances in the new tax year.

When is the UK stock market closed in 2026?

Below is a list of UK stock market holidays to help you plan your trading activities accordingly.

Source: London Stock Exchange

When is the US stock market closed in 2026?

If you invest in US stocks, also look at the New York Stock Exchange (NYSE) and Nasdaq’s open times and upcoming holidays this year.

Both stock exchanges’ standard opening hours are Monday to Friday 9:30am to 4pm Eastern Standard Time (EST) time, which is 2:30pm to 9pm BST in the UK.

The best-performing US stocks of the past are not always going to be the top dogs going forward. But they could still be worth a look – particularly if they have shown their ability to deliver strong and consistent returns over an extended period. 

We take a look at the latest analysis from investment firm 7IM, which reveals the top-performing companies in the S&P 500 over the short, medium and long term. 

You are probably expecting to see a long list of tech companies. And, to some extent, you would be correct. Players like Nvidia have delivered bumper returns in recent years, becoming some of the most popular stocks with investors. 

Apple is one of the biggest success stories of this millennium too. If you had invested $1,000 in the tech giant 20 years ago, it would be worth more than $450,000 today, according to data from Morningstar Direct.

However, the top tables also reveal life outside of the Magnificent Seven. For example, you might be surprised to see that the top-performing stock over the past 20 years is not a tech company, but Monster Beverage Corp. 

“If you’ve followed the investment headlines in recent years, this feels surprising – tech has seemed like the only game in town. But this is exactly why diversification needs to be taken seriously,” says David Freitas, investment writer at 7IM. 

“Concentration in any one space isn’t just about exposure to the potential lows. Having the blinkers on can also mean big opportunity costs,” he adds.

Best-performing stocks this year

Analysis from 7IM reveals that these are the seven best-performing US stocks so far in 2024 – the ‘alternative Magnificent Seven’, if you like.

Source: Bloomberg and 7IM as of 3 May 2024. 

Only one Magnificent Seven tech stock features – Nvidia. However, the top performer is another tech stock, Super Micro Computer. 

This tech infrastructure company supplies the servers needed to support generative AI, and has benefitted from the same tailwinds that are driving Nvidia. In fact, it enjoys close links with the chipmaker giant. 

Super Micro Computer’s recent success propelled it into the S&P 500 earlier this year. This is likely to “attract further buying interest from tracker funds in particular”, says Richard Hunter, head of markets at Interactive Investor. 

Despite this, the company’s share price has fallen since peaking in March, as its latest quarterly revenues came in below analysts’ expectations. 

Other sectors outside of tech feature in the table too. The energy, aerospace and food sectors are all represented, again highlighting the importance of diversification. 

Meanwhile, Apple and Tesla are notably absent from the top table year-to-date, having had a tough year so far in 2024. Both are battling an increasingly competitive marketplace in China, among other headwinds.

Best-performing stocks of the past five years

It can be tempting to look at year-to-date returns for a sense of how a company is doing in the here and now. However, it is important to remember that short-term returns rarely paint the full picture. 

What’s more, a company that can deliver consistent, sustainable returns is more valuable than a flash in the pan. As such, Freitas describes five years as a “fairer balance” when assessing company performance. 

Most people adopt an investment horizon of at least three to five years to help iron out any short-term volatility. Typically, it isn’t wise to invest your money in the stock market if you will need to withdraw it sooner than this.

These are the top-performing stocks over the past five years. Again, a broad range of sectors are represented across tech, energy, building materials and healthcare.

Source: Bloomberg and 7IM as of 3 May 2024.

Super Micro Computer tops the league table again, but it’s worth pointing out that the majority of its returns have come in the past year, with the first nine weeks of 2024 proving particularly lucrative. This highlights the importance of looking at the consistency of returns, as well as overall capital gains. 

What’s more, investors should remember the key tenet of investing – that past performance is no guarantee of future returns. If you look at Moderna, for example, you will see that the bulk of its returns over the past five years were concentrated in 2020 and 2021. The stock soared during this period as it developed and released its Covid vaccine. 

Of course, we are now operating in a very different context and the company will be reliant on other products as sales of its Covid vaccine continue to wane. It is hoping to release a new respiratory syncytial virus (RSV) vaccine later this year, subject to FDA approval. 

Likewise, while Tesla has delivered strong returns over the past five years (coming fifth in the list), its year-to-date performance has been pretty dismal. The e-vehicle manufacturer has suffered a slowdown in sales and production this year thanks to the tough economic backdrop, supply chain issues, and challenges in China.

Best-performing stocks of the past 20 years

Again, the top performers over the past 20 years have come from a range of different sectors. What’s more, the top performer is not a tech giant, but a drinks company.

Source: Bloomberg and 7IM as of 3 May 2024.

Monster Beverage Corp develops, markets, sells and distributes energy drinks. It has strong brand awareness and an in-depth understanding of its blue-collar target market. Its clever marketing strategy and a distribution partnership with Coca-Cola have been key factors in its success. 

Furthermore, Monster does not bottle its own beverages or distribute its own products. In other words, it has an asset-light business model. This has proved a significant advantage. 

As Bruce Packard pointed out in a recent MoneyWeek article, bottling plants have high capital costs. By staying away from this part of the process, Monster has been able to invest in branding, marketing and sponsorship instead of physical equipment. 

Monster’s success highlights the importance of looking across a broad range of sectors when researching opportunities for your portfolio. The likes of Apple and Nvidia have delivered glittering returns over the past two decades, but there is a world beyond Big Tech too. 

One of the most often-repeated investing mantras says ‘sell in May and go away, don’t come back until St Leger Day’, referring to a well-known British horse racing day which takes place in September.

The saying is thought to date back to a 1950s edition of Stock Trader's Almanac. In those days, financial professionals would typically spend most of the summer on holiday. The issue wasn’t so much that stocks would fall over the summer, but that they wouldn’t do a whole lot at all.

“The rationale is simply that, back in the mists of time, the main market participants (think bowler hats and coffee shops in London) were all away on their summer holidays and socials,” said Ben Seager-Scott, CIO at advisory firm Forvis Mazars. “There simply wasn’t much of a market and everything, at best, drifted until everyone came back after the summer.”

But does this stock market saying hold any value for your investments today?

The short answer appears to be no.

“There is scant evidence that it was true historically and I think there’s even less of a case now, with constant 24-hour news cycles, much wider market participation and ubiquitous mobile communication technology,” said Seager-Scott.

Did ‘sell in May’ work in 2025?

While the adage often fails to deliver, it rarely performs as badly as it did last year.

Major indices enjoyed encouraging returns between May and September, largely reflecting an uptick in investor sentiment following the chaotic fallout from Trump’s Liberation Day tariffs, announced on 2 April.

“Last year was a great example of when [selling in May] would not have worked out in your favour,” said Adrian Murphy, CEO of wealth manager Murphy Wealth. “Had you done so, you would have missed out on a good deal of the recovery from the tariff shocks in April – the S&P 500 rose more than 18% and the FTSE 100 gained more than 9% from May to mid-September

And the geopolitical tensions plaguing the market this year could be just as much of a reason to avoid selling in May in 2026 as they were last year.

“With the conflict in the Middle East, markets are volatile,” said Murphy. “No one knows how the situation will pan out in the short term, let alone the next few months and beyond.

“You are as likely to crystallise any losses and be forced to reinvest at a higher price at the end of the summer, as you are to make gains by buying back in again when the market looks cheaper,” Murphy added.

However, there is some evidence that trading volumes are lower over the summer and during the Christmas period. That can increase market volatility, because fewer buyers and sellers can necessitate larger jumps between prices in order to buy or sell a stock.

“But this is very much two-way,” said Seager-Scott. That extra volatility can push prices up or down, depending on sentiment.

“That may partly explain the Santa rally effect,” Seager-Scott said, adding that there is little evidence that this is a seasonal pattern and rather a label that is applied in hindsight whenever markets happen to rise in December.

Do stock markets tend to underperform over the summer?

It’s questionable whether or not there’s any empirical evidence to support selling your shares in May. Various studies have looked into the results, and between them they paint a fairly blurred picture.

Fidelity International, for example, found that selling stocks in May generated positive returns in just 14 of the last 38 years. Investopedia investigated the trend going back to the 1930s and while it found that summers have generally yielded higher returns than winter since the 1950s, the opposite was true for the two decades before then.

Analysis from investing platform IG has found that years when Trump is in office have completely subverted the traditional ‘sell in May’ mantra.

The analysis found that the S&P 500 has returned 9.5% between May and October during Trump years, vs 1.3% during non-Trump years over the past two decades. That said, Trump years have also seen better-than-average performance for the index across the full year, with average annual gains of 14.6% in Trump years compared to 6.8% in non-Trump years.

“While Trump-specific trading patterns have already emerged, most notably the TACO [‘Trump Always Chickens Out’] trade of buying the dip before Trump’s key trade and foreign policy deadlines, investors in US equities should also be reconsidering their summer trading habits,” said Chris Beauchamp, chief market analyst UK at IG. “We may yet see a ‘Summer of Trump’ trend emerge as investors cotton on.”

The FTSE 100, though, tends to fare worse between May and October when Trump is in power compared to years when he isn’t. The index fell 2% on average over the summer months in years when Trump was in power, compared to gaining 0.6% in non-Trump years over the last 20.

On the face of it, that might seem to suggest that if you are invested in UK stocks it could make sense to sell in May, at least when Trump is in power, but on the whole most investment experts don’t think this is a good idea.

“In terms of good investment practice, given that markets tend to rise over time and, importantly, dividend income also accrues through the year, I’m not convinced opting to be sat in cash half the time makes much sense to me,” said Seager-Scott.

On that basis, time in the market, rather than timing the market, seems to be the more reliable (and easier) strategy.

One trading indicator that is very popular during moments of market uncertainty is the CBOE Volatility index, which is sometimes known as Vix or even called the “fear index”. Vix is calculated from the price of 30-day call and put options on S&P 500 futures traded on the Chicago Board Options Exchange.

Call options give you the right, but not the obligation, to buy a specific asset at a set price at a set time, while put options give you the right to sell. In other words, it gauges the cost of taking out insurance against price moves in either direction: the greater the cost, the bigger the implied volatility. The index’s long-term average is around 21.

However, while the formula for working out Vix is pretty straightforward, traders don’t agree on how to interpret it. The simplest view is that the higher the Vix, the more volatility traders expect, and the more you should think about selling. However, contrarian investors argue that a high Vix can be a sign that people may be too cautious, which in turn suggests that it is time to buy. 

Because Vix itself can be extremely volatile, many people prefer to take a rolling average rather than the daily figure. There have been two key studies on using Vix as a trading indicator. One, by Duncan Lamont of asset management group Schroders, found that a switching strategy based on moving into bonds when the Vix exceeded 35 would have lagged the market, returning 7.6% between 1990 and 2020 compared with 9.9% earned from staying fully invested. But Butler University found that while switching would have lowered the raw return in most cases, it would have cut volatility by even more, leading to a risk-adjusted excess return.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

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What’s the better investment, growth stocks or dividend stocks with high dividend yields? It’s the age-old question, but why should investors have to choose? An alternative option, one that combines the best of both worlds, is to look for the market’s best dividend growth stocks.

This approach merges the benefits of seeking out growth stocks with robust cash flows, which will underpin further growth and shareholder returns. 

What’s more, dividend growth stocks come with an added psychological benefit. It’s hard watching the stocks you own fall 50%, but if you’re still picking up a couple of percentage points in income on the purchase price every year, that cushions the blow. 

You could also reinvest this income, buying more at lower prices to benefit from higher returns in the long term. 

A case for dividend growth 

S&P Global made this point in a paper published in June last year titled A Case for Dividend Growth Strategies.

The paper looked at the performance of equities in the S&P High Yield Dividend Aristocrats® index, which tracks a basket of stocks from the S&P Composite 1500® that have consistently increased their dividends every year for at least 20 years (the average in the index is 37 years). It compared the performance of these equities to those in the S&P 500® High Dividend Index—a high-dividend strategy built on the S&P 500. 

Those companies in the Dividend Aristocrats index had lower levels of leverage, high returns on equity and higher earnings per share growth over the previous three years compared to those in the standard S&P 500® High Dividend Index. In fact, over the three years to March 31, 2022, those in the latter index saw earnings per share fall -2% compared to 8.1% growth for the Dividend Aristocrats. 

And when it comes to dividend sustainability during times of stress, there’s a clear trend in the data. 29 constituents of the S&P 500 High Dividend Index, 36.1% of the index cut full-year dividends between 2019 and 2020, while only 7.2% of S&P High Yield Dividend Aristocrats Index constituents did so over the same period. 

Outperformance with income 

Looking back over the period December 31 1999 to March 31 2022, S&P’s researchers found the S&P High Yield Dividend Aristocrats outperformed the S&P Composite 1500 and S&P 500 High Dividend Index by an average of 140 bps per month and 49 bps per month, respectively. 

The index also outperformed in down markets, losing just 2.5% on average in down months for the S&P Composite 1500, outperforming the market by 1.4% in each down month on average.

These numbers confirm the fact dividend growth outperforms on average in the long term. 

They also show us yield only has a very small part to play. What matters is dividend sustainability. Companies with dividend track records stretching back four decades have shown they know how to balance cash returns to investors, capital spending and acquisitions to produce positive returns for all stakeholders. 

The Warren Buffett approach 

Focusing on dividend growth will give a similar return, it’ll just take time. The best example of this in action is Warren Buffett’s investment in Coca-Cola. When he bought the stock (he never buys for income) it had a yield of around 3%. Today, after nearly four decades of consistent dividend growth, his yield on cost stands at over 50%. 

Even today Coke remains a good model of what investors should look for in a dividend growth stock. The company does not require much capital spending each year as most of its production is outsourced to bottling companies (the likes of Coca-Cola HBC (LSE: CCH). Meanwhile, it can raise prices every year due to its strong brand loyalty and has a highly diverse product portfolio. 

Over the past decade, capital spending has ranged from $1.5bn to $2.5bn annually as operating cash flow has increased from $10.5bn to $11bn. This has left plenty of room to return cash to investors via both dividends with any left being returned as share buybacks. 

The dividend growth portfolio 

Buying a portfolio of dividend champions like Coke is a good way to build a dividend growth portfolio, but, as I noted at the beginning of this article, investing is hard and picking stocks is even harder. 

That’s why I’d choose to go with a fund specialising in quality income stocks. On the passive front, there’s the SPDR® S&P US Dividend Aristocrats ETF listed in both pounds and US dollars. There’s also the SPDR® S&P UK Dividend Aristocrats ETF (UKDV). 

Then on the active side, there’s a range of investment trusts that fit the bill. Finsbury Growth & Income (FGT) has a focused portfolio of businesses that dominate their respective sectors, with pricing power and robust cash flows to support their dividends. STS Global Income & Growth (STS) has a wider, more international portfolio of income plays. A little over a third of the portfolio is invested in the UK, with 56% invested in US equities.

Scottish American Investment Company (SAINTS) has less exposure to the US (35%) and its largest holding is Novo Nordisk. It also has a small allocation to corporate bonds and infrastructure trusts. 

JPMorgan Global Growth & Income (JGGI) has by far the best track record when it comes to creating value for investors. It targets a dividend of 4% of capital each year, funded with both capital gains and income, so it doesn’t focus purely on income stocks. It can buy growth stocks as well and trims these holdings to fund its dividends. A truly growth-focused fund with income as a second thought. 

The yields on gilts have jumped to highs not seen since before the financial crisis only adding more fire to the chorus of stockbrokers, wealth managers and financial advisers urging their clients to buy short-dated gilts.

They point out that if you buy a low-coupon gilt, such as Treasury 0.125% redeeming at the end of January 2026, and hold it to redemption, you are guaranteed a return of over 10%, equivalent to an annualised return of around 4.5%.

Nearly all this return will be capital gains. Though holders are liable to income tax on the negligible coupon, capital gains on gilts held for more than a year are tax-free. For a higher-rate taxpayer, an annualised, virtually tax-free, return of almost 4.5% might sound compelling. 

However, with inflation, though falling, still at 6.7%, real yields are still firmly negative. The return of the 2026 Treasury until maturity should exceed inflation, but not by much. Moreover, the credibility of the Bank of England as an inflation-fighter is far from proven. 

The US Federal Reserve waited till inflation had fallen below interest rates before pausing its rate rises and warned that further increases remained on its agenda should inflation persist. 

The Bank of England, however, paused while rates were still below inflation and it will be very difficult to resume the hiking cycle. Anyone investing on the basis of further significant and permanent falls in inflation should be wary. 

Gilts do not provide inflation-busting income  

The two-and-a-quarter-year return of 10% may be risk-free but investors should be able to do better. Despite the stellar performance of a few US tech-related mega-caps, 2021 and 2022 have been disappointing for most investors. 

As Ed Yardeni points out, analysts are now raising forecasts of future revenues and earnings. Though S&P 500 revenues per share are up 7.1% year on year, operating earnings per share are down 5.4%. But Yardeni expects operating earnings to rise 3.2% for 2023 as a whole, 11% next year and 9% in 2025.

For the  S&P 500 to fall over the next two years or return less than 10%, the market would have to be de-rated from 19.2 times this year’s earnings and 17.3 times next. 

Other markets, such as the UK, have significantly lower valuations but are also likely to see lower earnings growth. This is possible if bond yields rise as a consequence of inflation surprising to the upside but that would also be negative for the inflation-adjusted return from gilts.

Much more likely is that global stock markets will deliver a return of well over 10% by the end of January 2026 and probably over 20%. Investment trusts, currently trading on high discounts to net asset value, should do even better. Those who wait for their short-dated gilts to mature will probably miss the boat.

Trusts offer value 

Those worried about unbalancing their portfolios by switching to “risky” equities rather than “safe” gilts have another option. Infrastructure funds such as BBGI Global Infrastructure, HICL Infrastructure and International Public Partnerships yield between 5.5% and 6.5% and are likely to continue to increase their dividends broadly in line with inflation. Most of the renewable energy sector yields more, but continued weakness in UK electricity prices could hit dividend growth.

Some of the debt funds, such as TwentyFour Income Fund, yield over 10% though they will find it more difficult to increase dividends. High and rising yields are also available among property REITs; TR Property yields 5.5% but has raised its dividend at an annualised 5% in the last five years while yields above 7% among the specialist funds are common.

Yet the City has been selling these funds, hence their poor performance this year and wide discounts to net asset value. Smart investors should do the opposite.

“Bull markets,” said legendary investor John Templeton, “are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” The equity bull market started in October 2022 and is well under way, although it is further advanced in the US. Market sages are in denial, having warned of a recession that would dent stocks, but it has failed to appear. Ed Yardeni of Yardeni Research likens them to Vladimir and Estragon, the characters “waiting for Godot” in Samuel Beckett’s play. Godot never turns up.

The sceptics point to the narrow base of the bull market. The “MegaCap-8” of the US market (Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia, Netflix and Tesla) fell by 41% in 2022, but have since rebounded by 64%, so their share of the S&P 500 index has risen from 19% to 27%. The S&P 500 has climbed by 17% this year, but only by 5.5% without the MegaCap-8.

The forward earnings multiple of the MegaCap-8 has risen to 31 times, still short of the 38 reached in 2020, but up from 21 at the start of the year. This has propelled the multiple of the whole US market from 15 at the October low to 19.6. But the multiple for the rest of the S&P 500 has risen only moderately to 16.7. The forward multiple of the mid-cap S&P 400 index is only 14.1. The small-cap S&P 600 is on just 13.7.

The sceptics say the MegaCap-8’s performance is entirely driven by artificial-intelligence (AI) mania, a bubble waiting to burst. In truth the surge is mostly due to the actions taken in 2022 to reduce costs, streamline their companies and focus on profits. The sceptics may also be dismissing the impact of AI too readily.

Investment guru Ken Fisher shrugs off concerns about poor market breadth. “This is normal as you move to new all-time market highs. It is also normal for the stocks that got hurt the most on the way down, as in 2022, to bounce the most in the subsequent bull market.” Robust earnings growth is bringing multiples down, with both first- and second-quarter US earnings ahead of expectations.

European growth lags behind

The European and UK markets have rallied less and their valuations are lower – but GDP growth is lower and likely to remain so. In addition, GDP growth feeds into profit growth more easily in the US than in the UK or Europe. America’s higher valuation is thus supported by structurally faster growth in earnings. 

The UK and Europe might benefit if there was a preference for “value” investing over “growth”. But Ron Tabbouche of RIT Capital argues that “the expansion of earnings multiples, driven by lower interest rates, accounted for most of the 12% annualised return of equities in the last ten years, with rising margins, helped by globalisation, also a significant factor”. Now, growth in revenues is needed “to drive returns”. 

Higher interest rates and bond yields than have been seen in the past 15 years have held markets back, but won’t necessarily continue to do so. Equities performed well in the 1980s and 1990s against such a background as the high cost of debt constrained productivity-sapping government spending. Still, markets don’t go up in a straight line, and a setback is always possible. Almost inevitable is a change of gear in which the shares that led the market up initially take a breather and new leaders emerge. This makes now a good time to review a portfolio, taking some profits in the winners, selling the lame ducks and buying into some stocks left behind.

Only 4% of the companies listed account for all of the US equity market’s gains since 1926. Just 90 of 24,000 have made up half. Owning any of these but selling too early would have been a mistake. “Nobody ever went broke taking a profit” goes the saying. The riposte is that they went broke reinvesting in a loser.

So there are no simple rules to follow about when to buy or sell. Purging the losers in a portfolio has merit as investors worry more about losses than profits, but the risk of selling a loser is that it will then bounce back. It’s best to make an active decision: either sell or double up.

When it comes to new investments, it is tempting to buy a share that has fallen a long way as it’s easier to believe that a share price that has halved can double than to believe one that has doubled can double again. The latter is more common. As this year’s huge rebound of the MegaCap-8 demonstrates, if you don’t buy quality growth shares when they are temporarily out of favour, you probably never will. Cheap shares can wait.

Cash and government bonds

Bank deposit rates and the yield on government bonds are the highest for 15 years. But resist the temptation – those yields do not look nearly so attractive when inflation and taxation are taken into account. Besides, the appetite of professional investors for bonds will have been dulled by the savage bear market of the past 18 months, which ended a 40-year bull market. 

Polar Capital Technology (LSE: PCT) and Allianz Technology (LSE: ATT) trusts

Those who held on to these in defiance of the consensus that the sector had further to fall have good reason to feel smug. The shares still trade on double-digit discounts to net asset value (NAV), the bears are still in denial and their capitulation lies ahead. Still, it’s hard to believe that the MegaCap-8 will continue to outperform and there are plenty of attractive alternative investment opportunities. This suggests some profit-taking.

Scottish Mortgage Investment Trust (LSE: SMT)

The shares have more than halved from their early 2021 peak and a premium to NAV has turned into a 16% discount. Yet the share price has been rising steadily since May, the NAV is up by 8% this year and good news is emerging on unlisted investments such as SpaceX. This is a trust worth adding to, not cutting.

Ruffer (LSE: RICA), Capital Gearing (LSE: CGT), Personal Assets (LSE: PNL)

These defensive trusts performed well in 2022, but have disappointed this year. Managers remain bearish. Ruffer’s allocation to equities is at a record low of 14%. Capital Gearing has just 27% in risk assets, including alternatives and property. The trusts are structurally averse to equities, so they tend to be poor stockpickers. Bonds are no longer defensive, limiting the scope for diversifying risk. The shares trade on low discounts to NAV, so these are prime candidates for a sale.

RIT Capital Partners (LSE: RIT)

RIT has also been a poor performer this year, yet the shares trade on a 20% discount. Exposure to quoted equities is only 34%, but 40% is in private equity. This was a minor drag on returns in the first half of 2023, but should now be positive. RIT’s managers are “keen not to sacrifice the upside” so they are not structurally bearish. Their stated view that “revenue growth and margins rather than multiple expansion will drive returns from now” implies that they are growth rather than value-orientated. The shares seem at least worth holding onto at the current price.

Infrastructure funds

The shares have heavily derated this year and are now trading at discounts of between 5% (BBGI Global Infrastructure, LSE: BBGI) and 21% (HICL Infrastructure, LSE: HICL). 3i Group’s (LSE: III) shares are only down 3% over one year thanks to some good asset sales, but the others have lost roughly 20%. Investors have taken into account the effect of higher interest rates in pushing up the rate at which future cash-flows are discounted to present values (thereby reducing asset values), but taken no account of the benefit of higher inflation on those cash flows and hence dividends. This leaves the funds very attractively priced relative to inflation-linked gilts with a yield approximately 5% higher, making them a strong hold, especially if held in a Sipp or an Isa.

Renewable energy funds

The same applies to these, although their exposure to market electricity prices has been an additional adverse factor. Over-enthusiasm about investment, especially by the government and opposition, has threatened lower long-term prices, but the discounts of the funds to net asset value is bringing their expansion plans to a halt. Vattenfall’s decision to suspend work on its North Sea site due to rising costs makes excess capacity look less likely, while demand for electricity will grow  steadily. This makes the sector attractive longer term, with even the highest quality funds yielding roughly 6%.

UK equities

It’s probably too late to bail out from a market that has reverted to underperformance this year. The market certainly looks cheap, but may deserve to remain so. There is very good value in small- and mid-cap funds and in those, such as Finsbury Growth & Income (LSE: FGT), investing in high-quality global businesses. The best returns are coming from the supposedly high-risk recovery shares most funds avoid: Rolls-Royce has more than doubled. But avoid stocks whose business models are broken, such as banks and general insurers.

In the very long term, shares have delivered an excess annual return over government bonds of nearly 4%, but in the bull market for bonds, the excess return was much lower. It could now be considerably higher for an extensive period, especially as the earnings multiples of most markets have fallen in response to higher bond yields. For equity investors, happy days are here again. 

The Russell 2000 is known as the world’s “biggest small index”. It offers investors the chance to invest in the heart of America. These small- and mid-cap stocks are diverse and offer more domestic focus than the multinational giants at the top of the S&P 500. In addition to providing important portfolio diversification, smaller companies typically outperform in the long run, owing to their greater scope for long-term growth.

Excluding the “Magnificent Seven” from the S&P 500’s return in 2023, it reveals that the remaining 493 stocks actually lagged the Russell 2000. Small caps have recently traded on historically wider discounts to large caps. However, 37% of the Russell 2000 index is unprofitable, and small caps have an average leverage ratio of 4.3 times. Disparities between market averages and individual stocks require active management to identify the winners and losers. Our investment process focuses on three key attributes: quality businesses, quality management and attractive valuations. Here are three firms that meet these criteria.

US small cap safe bets

MSA Safety (NYSE: MSA) is the global leader in the development, manufacturing and supply of safety products that protect people and facilities. MSA’s core products include self-contained breathing apparatus and other protective gear for firefighters; gas and flame detection systems used in a variety of industrial settings; and industrial head protection and fall-prevention equipment. Given the mission-critical and non-discretionary nature of safety products, MSA tends to experience less cyclicality than other industrial companies, with regular replacement of safety equipment often mandated by law. The company makes a healthy profit and requires limited capital investment, driving strong and durable cash flows.

Encompass Health (NYSE: EHC) is the largest operator of patient rehabilitation facilities in the US. As rehabilitation services are needs-based, patient volumes tend to be non-cyclical, while also benefiting from demographic trends as the US population ages. The combination of steady revenue growth, attractive profit margins and strong cash flows is a testament to the quality of the business, and we think Encompass’s strong management team and attractive valuation make the stock a promising investment.

MACOM Technology Solutions (Nasdaq: MTSI) designs and manufactures semiconductor technologies for optical, wireless and satellite networks. Macom has diversified exposure to applications in the industrial, telecommunications and data-centre markets, with the company’s multi-decade record and more than 600 patents underpinning a strong competitive position.

US small caps powered by artificial intelligence

Macom generates very attractive profit margins and strong cash flows, and is run by a management team with a history of creating value for shareholders. Recently, shares have benefited from the group’s exposure to optical components for artificial intelligence (AI) applications with data centres, which has driven a strong rally in shares. While we’ve taken some profits on recent strength, Macom remains a high-conviction position for the long term.

The US economy remains strong, with falling inflation and rising real wages offsetting dwindling savings and tighter credit conditions. We think moderate consumption growth should carry the US economy to a soft landing. We remain positive about small caps thanks to compelling valuations and strong fundamentals. Robust earnings growth, combined with low valuations, could drive small caps to regain the momentum of 2000-2011, when they outperformed. Investors remain underexposed to small caps. However, as their fundamental merits are rediscovered, we anticipate a return to the sector.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

If you’ve been keeping a close eye on share tips 2026, then don’t miss this weekly round-up of the top stocks to consider for your portfolio.

The MoneyWeek share tips 2026 guide pulls together some of the most popular stocks from top share tipsters around.

As well as the UK financial pages, we look at publications across the pond for investors who want to diversify their holdings internationally.

Investors will undoubtedly want to refresh their finances this year – we look at dividend heroes, what's happening with gold prices and the best way to invest. If you're new to investing, here's how to start.

This list is updated weekly.

Share tips 2026: top stock picks of the week

Stocks to buy

1. Tapestry (NYSE: TPR)
Barron's
Tapestry's luxury leather-goods brand, Coach, is popular with younger consumers as it is more affordable than European ultra-luxury brands. The US group has upgraded its annual sales-growth guidance and its gross margin has improved, even with marketing and investments in new products. Despite economic challenges facing younger consumers and concerns over Tapestry's other brand, Kate Spade, analysts expect double-digit earnings growth amid global expansion. $145

2. CMC Markets (LSE: CMCX)
Investors' Chronicle
CMC Markets' full-year pre-tax profit of £101 million fell short of expectations owing to high operating and legal costs. But this financial year, CMC expects net operating income to total £460 million-£480 million, a 17%-22% increase from last year. This is due to the company's shift from being tied to volatile trading patterns to establishing itself as a “financial-architecture specialist for corporate clients”, making income more stable. This led to a 33% increase in net investing revenue, while the core trading division continued to grow. 462p

3. Mitie (LSE: MTO)
Investors’ Chronicle
Mitie's full-year revenue increased 10.5% thanks to organic growth and acquisitions. Adjusted operating profits rose 13% to £264 million, while the underlying margin improved despite rising national insurance costs. Free cash flow exceeded expectations, and new business wins boosted orders to a record £16.3 billion. Earnings per share are expected to increase from 14.4p to 16.4p by fiscal 2028. Despite the stock's valuation being broadly in line with its peers, the group has delivered “earnings surprises” over the past decade. 163p

Stock to sell

1. Ulta Beauty (NASDAQ: ULTA)
Barron's
Ulta Beauty's stock has more than doubled since the pandemic, but it is now down over 30% from its highs of February 2026. The US cosmetics retailer reported higher first-quarter sales, higher average purchases and prices, and an uptick in the number of members in its loyalty programme. But investors are concerned about the sustainability of earnings growth and margins in addition to the need for heavy investment to maintain market share amid fierce competition. Influencers promoting products on social media makes it difficult for bricks-and-mortar players to keep up. While Ulta's TikTok Shop is attracting new, younger customers, other consumers have to contend with high inflation. Avoid. 467p

Stocks to hold

1. Quanta Services (NYSE: PWR)
Barron's
America's Quanta Services, a provider of key infrastructure for electric utilities and pipelines, has benefited from the surge in demand for AI, with the shares up 50% since October 2025. Major technology firms are set to invest trillions in AI, leading to increased demand for electricity and data centres, which will need power plants to keep running; this helps explain Quanta's record $48.5 billion order backlog. Quanta is the partner of choice for many utilities owing to its equipment and large labour force, and it could benefit from the potential expansion of ultra-high-voltage transmission lines. Buy ($707).

2. VP (LSE: VP)
Investors' Chronicle
VP swung to a pre-tax loss due to a soft construction market and lower revenues. However, the equipment-hire company maintained the dividend, and leverage remained below target. Adjusted profit declined 26% to £27 million, in line with guidance. VP's restructuring of the Brandon Hire business, which included cutting branches and jobs, resulted in a £25 million charge, but should bolster margins. VP expects trading for the new fiscal year to meet expectations, with sales of £352 million and adjusted profit of £33 million. Analysts expect double-digit earnings-per-share growth. Buy (465p).

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Dividend aristocrats are, as their name suggests, the aristocrats of the investing world.

A company can only achieve dividend aristocrat status if it has paid and increased its dividend for 25 years or more - a tough challenge for most corporations.

Indeed, in 2020, the average lifespan for an S&P 500 business was just 21 years.

So, any business that’s achieved dividend aristocrat status has not only outlived most large public US corporations but it’s also been able to reward shareholders with ever-increasing returns along the way.

Why dividend stocks?

Dividend aristocrats are the kings of the dividend stock universe, and any investor should have some exposure to these equities.

There’s a considerable volume of research that shows the power of dividends over the long term. According to Hartford Funds, an investor who put $10,000 in the S&P 500 in 1960 would have been sitting on a portfolio worth $795,823 at the end of 2021, excluding dividends.

However, an investor who’d reinvested all of their income would have a portfolio worth nearly $5 million.

Dividend stocks are even more powerful investments during periods of market and economic uncertainty. In the 1940s, 60s, and 70s, decades in which total annual returns were less than 10%, dividends accounted for between 44% and 73% of an S&P 500 investor’s total returns.

In the 1950s, 80s, and 90s, when total annual returns were well into the double digits, dividends contributed between 30% and 16% to overall performance.

Overall, the average contribution from dividends to total equity returns in the S&P 500 between 1930 and 2021 clocked in at 40%. These numbers speak for themselves. You can’t afford to ignore dividend stocks.

What is a dividend aristocrat?

The data shows that dividends are a crucial component of investment returns in the long run, but not all dividends are created equal.

Companies can (and frequently do) cut their dividends to investors, and this can lead to sudden share price declines, wiping out years of income returns in just a few hours.

As dividends are paid out of company profits, if a business sees a sudden drop off in profits, it might have to cut its distribution to investors. That’s particularly likely if the business is paying out more than it can afford in the first place.

Companies only qualify as dividend aristocrats if they’ve paid and increased their dividends for 25 years or more.

This track record tells investors a lot about the underlying business. It shows profits are predictable, and the company has a level of pricing power as well as competitive advantages.

It also shows the company is well-run, with its managers focused on generating long-term value rather than short-term profits. Dividend aristocrats are also likely to have strong balance sheets with low levels of debt.

As you might expect, there are only a handful of these companies in the S&P 500. There are just 65 stocks that qualify today.

Here are the five highest-yielding dividend aristocrats

The dividend aristocrats with the highest yields

The dividend aristocrat with the highest yield also has one of the longest payout track records.

Topping the list is 3M, with a forward dividend yield of 6%. This company has 64 consecutive years of dividend growth.

Next up is Walgreen Boots Alliance, with a dividend yield of 5.9% and 47 consecutive years of dividend growth.

IBM currently yields 5.3% and has been paying and increasing its dividend for 28 consecutive years.

Realty Income is next on the list, with a 4.9% dividend yield and 28 years consecutive years of dividend growth.

And finally, the dividend aristocrat with the fifth highest dividend yield is Amcor. The company has increased its dividend for 40 consecutive years and currently yields 4.5%.

Should you buy these dividend aristocrats?

All of these companies qualify as dividend aristocrats, but we need to remember that this is a backward-looking metric.

We know these five companies have paid and increased their dividends for at least 25 years. However, we have no idea if they will be able to continue to increase their dividends for the next 25 years.

Of these five businesses, IBM’s dividend appears to have the weakest foundations. Over the past decade, the storied tech company has really struggled to keep up with its peers.

Even though the firm has been around in one way or another for more than 100 years, it has struggled to reinvent itself for the new tech age. Over the past decade, revenues have slumped by around half, and IBM's debt-to-EBITDA ratio has risen to 4.5, up from around 1.3.

The company hasn’t cut its dividend, yet, but as revenues have fallen, the payout has consumed an ever-increasing amount of its income. Dividend cover - the number of times the payout is covered by earnings per share - has fallen from 2 in 2017 to around 1.5.

For the time being, IBM might be able to maintain its dividend based on these figures although there’s no guarantee.

The company with the highest dividend cover on the list is the integrated healthcare, pharmacy, and retail company, Walgreens Boots Alliance.

Unlike IBM, this company has reported steady revenue growth over the past decade to support its dividend and the balance sheet. Based on current forecasts, the dividend payout ratio sits at 2.3 times, meaning the payout is covered more than twice by earnings per share.

At the end of January, we made the argument that 2023 would be a bumper year for the stock market.

We were talking specifically about the S&P 500, but where it goes, the UK will follow. In fact the UK may even outperform.

A month and a bit on, let’s check in on that call.

The UK’s a mess, the US’s best days are behind it, the economy, political division, political incompetence, the War in Ukraine, China, inflation - doesn’t matter. All that’s priced in. Is the market going up or down? The trend is your friend …

Why the S&P 500 could outperform in the year ahead

My main reasoning for the call was that we had what certain technical analysts call, “the Trifecta”.

First, we had the Santa Claus rally - that would be a rally in the S&P 500 over the week between 23rd December and 4th of January; then we had a positive first five days of the year, and then a positive January.

You don’t get these trifectas very often, but when you do, the portents are good.

“Since 1950,” says technical analyst JC Parets, “whenever the S&P 500 has completed the Trifecta coming off a down year, the stock market has never been down. And it's up almost 27% on average, more than three times the average annual rate of return for the S&P500.”

Add to that was the fact that this is the third year of the four-year US Presidential Cycle. This is normally a good year for stocks, the standard explanation being that policymakers are trying to get everyone in a positive frame of mind in time for the next election. The tough economic medicine tends to come in years one and two, and the expansionary policies in year three.

While years one, three and four average gains in the 6% to 7% range, with a 70% positivity rate, year three averages 16% with a positivity rate of around 85%. Very good odds.

Now the stock market is above its long and medium-term moving averages and they are sloping up. Ideal positive trend stuff.

There will be bumps along the way. We had one last month. Quite a big one in fact. The bears piped up. But, judging by the rally we saw towards the end of last week, the bulls spoke back. Now the bears seem to have the upper hand - Tuesday was not a great day.

Technicians will be pleased with the progress. The stock market was a little overheated. It corrected back to its 200-day moving average and then rebounded. I would describe that as a healthy pullback in an ongoing bull market. Now it’s consolidating.

The FTSE 250, which is probably a better barometer of UK stocks than the FTSE 100, has replicated the action in the S&P500. It had a great January, a rocky February, and so far it’s having an up-and-down March. It began the year at 19,100 and now we are at 19,825, so we are roughly 4% in the black for the year.

(The S&P 500 started at 3,820, and now we are at 4,050, so it’s outperformed the FTSE 250 by about 1%).

The FTSE 100 is more international in flavour than the FTSE 250, especially with so many energy and mining giants listed. It kicked off 2023 at 7,555 and today it’s at 7,900, so we are 4% to 5% - and just a few points off all-time highs.

If the world’s about to end, I’m not seeing it in the price action.

I’m standing by my call: we are on course for a good year in the equities markets.

How to play the 2023 stocks market rally

So how to play all this?

Be long equities.

If you haven’t the time or the inclination to seek out individual companies, you could go for investment trusts. One that I own in my ISA is Law Debenture Corporation (LSE:LWDB) the aim of which is to aim is to “achieve a higher rate of total return than the FTSE Actuaries All-Share Index Total Return through investing in a diversified portfolio of stocks.”

Similarly, Murray International (LSE: MYI) invests in global equities, with roughly 25% to North America, 25% to Europe and 25% to Asia, with the rest in the UK and in developing markets. Lots of energy, tech and healthcare holdings, but geared towards large cap and value plays.

Another option is simple tracker funds. There are so many to choose from.

Tracking the FTSE 100, for example, there are iShares Core FTSE 100 (LSE:ISF); the Vanguard FTSE 100 (LSE:VUKE) and HSBC FTSE 100 (LSE:HUKX).

With the FTSE 250 the same suspects offer options. For example, the iShares FTSE 250 UCITS ETF (LSE:MIDD) and Vanguard FTSE 250 UCITS ETF (LSE:VMID).

Similarly, for the S&P500, there’s the Vanguard S&P 500 (LSE:VUSA), the iShares Core S&P 500 (LSE:CSP1) and the Invesco S&P 500 (LSE:SPXP). (Be careful with US tracker ETFs, one way or the other they seem to get you on the forex).

Finally, there is always spread betting. This carries the greatest potential gains - but also the greatest potential losses.

Caveat emptor and manage your risk!

There is an old adage in investment that you should buy a share or market whose price rises on bad news. The logic is that the price action shows that the bad news was fully or over-discounted so the outlook has improved.

Storm central for the bear market in 2022 was growth, especially technology stocks and Nasdaq-listed equities. But, with Nasdaq up 16% so far this year, against less than 9% for the S&P 500, this is where the best gains have been seen.

A perfect example was provided by Meta, probably the most despised and hated “growth” stock of all.

Meta leads growth stocks higher

Last week, it announced quarterly earnings that had halved year on year and were 22% below consensus forecasts. Yet the share price - already up over 60% from its November low - gained another 25% instantly.

The almost equally-hated Tesla, actually beat earnings estimates by 5% on turnover up 37% year-on-year (though many were expecting much worse). Its shares are up over 50% this year.

Netflix was one of the first to announce disappointing results, but it was also one of the first to take remedial action. Its fourth-quarter revenue was flat and earnings were poor. Still, the shares gained on strong subscriber growth. They have now doubled since their June low.

What about Amazon, Apple and Alphabet, whose share prices, we were told by the media, had fallen on disappointing earnings?

They did fall after earnings, but these falls need to be put into perspective - they are still up 27%, 16% and 20% respectively this year.

They’re all concentrating on lowering costs and focusing their businesses; when this comes through in better-than-expected quarterly results, the share prices could jump 10% before you can blink and 20% before you can place an order to buy.

A better-than-expected earnings performance

Ed Yardeni points out that, with 38% of the S&P 500 having reported for the fourth quarter, the earnings season is off to a poor start. Revenues have beaten reduced expectations by 1% and earnings by 2.5%. Those are the weakest metrics since 2013. Year-on-year revenues have risen 6.8% and earnings are up 4.5%. JP Morgan, with data on 45% of the S&P500, reports earnings down 5% year on year but up 4% in Europe.

What this misses is that the pessimists were expecting much worse - a dramatic collapse in earnings that sent valuation multiples sky-high with no visible prospect of recovery. That looks increasingly unlikely as economic forecasts of a severe recession turn into a mild one or just a slow-down and cost pressures abate.

It’s not just the technology sector that the bears have had their teeth into. The share prices of housebuilders and property companies have been recovering even as their business outlook deteriorates.

Even more dramatic is the turn-around in the private equity sector where high discounts to net asset value were attributed to valuers being totally out of touch with current markets.

Private equity discounts narrow as sentiment improves

3i announced a year-end valuation last week, based on strong earnings growth from its portfolio, 7% above brokers’ estimates.

This caused the share price to jump to an all-time high, 50% above last October’s low and in line with JP Morgan Cazenove’s estimate of net asset value. The market is coming down on the side of the valuers, not the Armageddon crowd.

Even more remarkable has been the response of markets to last week’s increases in interest rates; 0.25% to 4.5% in the US, 0.5% to 2.5% in the eurozone and 0.5% to 4% in the UK.

Newscasters donned their favourite masks of being the messengers of grim news for all of us but equity and bond markets jumped for joy. The yield on 10-year gilts dropped to 3% and on US Treasuries to 3.4%, indicating investors’ confidence that the average inflation rate over the next ten years will be respectively well below 3%. This in turn boosted growth equities, making future earnings more attractive, and those with good yields.

Admittedly, the fall in energy prices has raised confidence that inflation will fall and the economic downturn will be shallow, hence the Bank of England’s sharply upgraded economic forecasts but few economists took their previous gloomy forecasts seriously.

Nobody should be surprised that equity markets have started the year well and look set to

improve further. US equities rose 6.6% in January while the FTSE 100 rose 4.2%; performance in January has always been a good harbinger for the year as a whole.

Long-term US returns have been heavily concentrated in the pre-election and election years, which bodes well for 2023 and 2024.

Sentiment, as measured by surveys of both private and professional investors, was at extreme lows, suggesting it couldn’t get much or any worse. 2022 brought record outflows from retail funds in the UK of £25.7bn, far ahead of the second worst year, 2008, which saw inflows of £4.2bn. Yet the financial system was shaken to its core in 2008, making 2022’s exodus look bizarre. Retail investors have an unfortunate tendency to buy high, sell low, so act as a contrary indicator.

What could go wrong to upset the rally?

What could go wrong? Commodity prices could go back up (they are already off their lows) but if that’s due to rising demand, notably from China, rather than restricted supply, that would not be negative for markets.

The dire warnings about the health consequences of China opening up have not been fulfilled, China has surely lost interest in invading Taiwan and is focused on improving the standard of living and quality of life of its people.

Equity valuations, especially in the US, could get too high, leading to a setback in markets or consolidation as earnings catch up. This is quite normal after the initial recovery from a bear market. With valuations already optimistic, bond yields could rise, but this would slow, not reverse the recovery in equity markets.

The bulls aren’t yet roaring - which is a good sign - but the silence of the bears is deafening.

Equity markets are going higher.

“As January goes, so goes the rest of the year,” is the wisdom, and January is going rather well. So far. Here in Britain the FTSE 100 has broken out to all-time highs. In the States, the S&P 500 is up 5% for the month.

With all this in mind, here is a cool stat I wanted to share with you - one I just learnt from JC Parets over at All Star Charts.

If you get, first, a Santa Claus rally - that would be a rally in the S&P 500 over the week between 23rd December 23 and 4th of January - then a positive first five days of the year, and then a positive January, you have what Parets calls “the Trifecta.”

(Note by the way there was no Santas Claus rally in the years going into the big crashes of 2000 and 2008).

It’s only January 26. There is another week to go. But barring a major turndown over the next few days, it looks like we have Parets’ “Trifecta”.

We got a 0.8% Santa Claus rally - doesn’t sound like much, but Parets argues it is “more than three times the historical returns for all the other seven-day periods throughout the year.”

US stocks rallied another 1.4% in the first five days of 2023. And things, as we have already noted, are looking good for a strong January overall.

So here’s the stat that will get bulls salivating.

“Since 1950, whenever the S&P 500 has completed the Trifecta coming off a down year, the stock market has never been down. And it's up almost 27% on average, more than three times the average annual rate of return for the S&P500.”

27%? I’ll take that!

You don’t get these trifectas very often, by the way.

The US Presidential Cycle could be good news for markets

Here’s some more bull food.

We are coming into the third year of the four-year US Presidential Cycle - the year when the powers that be try to get everything looking hunky dory in time for the next election. They are normally very good years for stocks.

Don’t believe me? Charles Schwab researcher Lee Bohl has analysed market data since 1933 to find that the strongest market gains came, in general, with the third year of the presidency. Here are the average returns in each year of the presidential cycle between 1933 and 2015:

• Year after the election: +6.7%
• Second-year: +5.8%
• Third-year: +16.3%
• Fourth-year: +6.7%

Note that 2019, President Donald Trump’s third year, saw a 27% rally, which would carry the above averages even higher.

Between 1933 and 2022, the stock market saw gains in roughly 70% of calendar years, says macrotrends.net. But in year three of the presidential election cycle, that rises well over 80% of the time. We like 80% probability rates.

The portents then are very good.

But, but, but … the economy, the war in Ukraine, China, inflation, Russia, political uncertainty, political division, social unrest, the bear market blah blah.

Markets don’t care about that stuff - except when they do. They are tired narratives, anyway, and they are all “priced in”.

For now, the easiest direction of travel is up.

The trend is your friend

Here’s one final bit of bull food.

The S&P 500 peaked in early 2022 and trended lower for the year - with occasional rallies.

But it seems to be just breaking above its falling trend line, as the chart below isolates.

This kind of signal might not mean much in isolation, but coupled with everything else, you’ve got to say things are looking up.

Trend-followers will also have observed that all the short- and intermediate-term moving averages - over say seven days, 21 days, 55 days, even 144 days - are now sloping up. The S&P 500 has broken above its 200-day moving average. It won’t be long before that turns up too.

In other words, we have a new uptrend in place. Trends are powerful things. You might have heard me mention that once or twice.

So whether it’s the technicals, the cycles, or the historical patterns, there are lots of reasons to be bullish for the year ahead. After the year we have just had it’s hard to feel that way - it’s far easier to be stuck in a negative mindset, just as perhaps we were too slow to get into a negative mindset at the onset of the bear. But your author reports nevertheless on what he sees.

On the other hand, it might, for example, be worth pointing out that we are still below where we were in early December.

And that, as always, there is a lot that can go wrong in the world.

But, for now, it’s a Wednesday morning and I’m feeling bullish.

Every penny counts at the moment. Amid rising bills, such as energy, food and fuel, alongside higher borrowing costs, it may be tempting to dip into your hard-earned savings and investments to find some much-needed extra cash.

A survey by fund supermarket AJ Bell found that one in five investors on its platform plan to use money from their Isa, pension or investment account to help family with the rising cost of living.

Whether it is for you, friends or family, here is what to consider before raiding your investment pot, plus some alternative courses of action.

The risks of cashing out

It has been a tough year for investors, with the FTSE All Share Index down 6% and the S&P 500 officially in bear market territory after dropping 20% over the past 12 months amid plenty of economic and political uncertainty during 2022.

Selling out of your investments now may be tempting to avoid further losses and free up the money to put towards your own rising costs, but that could damage your investment portfolio in the long-run, hampering your own financial or retirement goals.

Lucy Coutts, investment director at wealth manager JM Finn, warns that if you move out of stocks in a downturn then you won’t do as well as those who remain invested.

“You can’t time the market, but the most important word in investment is time,” she said.

“It is deeply uncomfortable at the moment, it has been an awful year. There is little we can give in terms of comfort except that history shows you will do better if you stay the course.”

The main risk of cashing out during a downturn is that you miss out on a stock market rally.

“Those who do sell to cash in a bear market will miss the recovery as and when it comes,” said Ben Rogers, chartered financial planner at Equilibrium Financial Planning.

“Unfortunately, no-one can predict when this recovery will be.”

The trouble with trying to time the market, according to Albert Soleiman, head of CMC Invest UK, is that you need to get it right twice.

“Once when you decide to sell your investments and again when you decide to put money back to work,” he added.

Review your investments

Rather than cashing out, check where your money is invested and if you can cut costs.

“Although it may be sensible to remain invested, you don’t have to remain invested in the same funds” said Phil Haden, a chartered financial planner at Prosperity Wealth.

“Reviewing your existing holdings ensures they are positioned correctly to maximise growth when the markets eventually improve.”

Review your budget and expenses

Assessing your own expenses and household bills may be a more effective way of releasing much-needed cash instead of using your investments.

“You should understand what your essential income needs are and what you are spending on discretionary expenditure,” said Adam Wing, a financial adviser for UHY Hacker Young.

“You may then be able to see where you may be able to make savings”

Abby Birch, a financial coach at Claro Wellbeing, says it is worth negotiating with your bill providers to reduce your necessary costs where possible

“If insurance renewals are coming up, make sure you shop around for the best deal rather than opting for an auto renewal, Birch said.

She suggests making the most of workplace benefits that could cut the costs of necessities such as childcare or shopping, or you could see if your employer can provide any financial support.

Make sure you are claiming all the benefits you are eligible for by using an online benefits checker such as entitledto.co.uk. Councils also have their own household support funds that may pay for things like energy and water bills for struggling families.

Put in on plastic

A credit card could be a useful alternative for an urgent and essential one-off purchase.

“Anyone with a good credit record can consider borrowing on a credit card with 0% on purchases for a period,” said Sarah Coles, senior personal finance analyst for Hargreaves Lansdown. “Then you can focus on paying the debt off before any interest is due.”

Take a look at our article on the best 0% purchase credit cards for the best deals available.

Make sure you keep up with repayments otherwise you could face high interest charges which would just add to your costs.

“If it’s a sizeable chunk of tens of thousands of pounds, you’ll need to weigh up the downsides of dipping into your investments against the cost of borrowing,” she adds.

“Only you will know whether these costs are better or worse than raiding your investments.”

Raid the Bank of Mum and Dad

Family members may be able to help if you are struggling and could make use of tax allowances for passing on wealth.

HMRC gives everyone a yearly allowance of £3,000 that can be given away tax-free each year without forming part of their estate, therefore reducing any inheritance tax liability. Parents or grandparents could use this allowance to pass money on.

There is also a small gift allowance of up to £250 that can be used each year, although birthday and Christmas presents don’t count.

Additionally, there is a separate wedding or civil partnership allowance of up to £5,000 that can be given to a child or up to £2,500 for grandchildren or £1,000 to anyone else.

“It is always worth having a conversation with family members and seeing if there is an opportunity for someone to use their gifting allowance,” said Rosie Hooper, financial planner at Quilter.

“The next decades are going to see trillions flow between generations, so while not everyone is in the position to receive familial help, some will be.”

The Bank of Mum and Dad will, of course, be facing its own financial pressures and may be concerned about helping with purchases such as for a property when there are concerns about a housing market crash.

The latest English Housing Survey showed the proportion of first-time buyers using a gift or loan from family or friends last year fell to 23% from 34% two years ago.

Taking money out of your investments is still an option if you’ve already exhausted other avenues.

“At the end of the day, money is a tool, not a goal,” said Alena Zavarin, chartered financial planner at Anderson Financial Management.

“In the ideal world you would leave your investments in place until markets recover, but in real life that capital may provide a much-needed relief – even if it comes with a price. The key is to manage withdrawals carefully and only take as much as needed.”

Index and tracker funds are a multi-trillion dollar market, letting investors replicate the performance of a particular market or asset class – but how do they work?

Index funds have been around for decades. They are a low-cost way to diversify a portfolio or gain exposure to a sector or theme. Index trackers are often among DIY investors’ top fund picks as they offer value for money, low fees and reliable market-level performance.

They replicate a specific market index, such as the FTSE All-World or the FTSE 100, by holding all or a representative sample of the stocks or bonds within that index.

“Rather than attempting to beat the market, index funds aim to match it, offering predictable returns and minimal management costs,” says James Norton, head of retirement and investments at Vanguard Europe. As such, they represent a passive as opposed to active investment style.

The first ever index fund that was available to retail investors was the Vanguard 500 Fund, introduced in 1976 by Vanguard’s founder John ‘Jack’ Bogle. Bogle is often viewed as a pioneer of index investing, and nearly 50 years on the Vanguard 500 Fund still tracks the returns of the S&P 500.

They have stood the test of time, with index-tracking equity funds registering net retail inflows of £1.1 billion in January 2026 according to data from the Investment Association. They are popular both with beginner investors and with more experienced hands as they provide convenient exposure to a wide variety of assets.

Advantages and disadvantages of index funds

There are four key benefits of index funds, according to Norton. These are:

Low cost: By avoiding the high fees often associated with active management, index funds help investors retain more of their returns.

“In many areas of life, higher costs are correlated to a better product,” says Norton. “However, with investing, high cost is simply a hurdle for the manager to beat simply to break even. Data suggests that index funds outperform more expensive active funds over both the short and longer-term.”

Diversification: Broad exposure across sectors and geographies helps manage risk effectively. Investors who hold a diversely-invested index fund will by default own the best performing stocks. As Jack Bogle said, “Don’t look for the needle in the haystack, just buy the haystack.”

Transparency: With index funds, investors know exactly what they own and how it performs.

Discipline: Index funds encourage long-term investing and reduce the temptation to try to time the market.

However, Norton adds that investors should consider the following principles when investing using index funds:

• Define clear goals: Align investments with long-term objectives.
• Maintain balance: Diversify across asset classes and regions.
• Minimise costs: Prioritise low-fee index funds to maximise net returns.
• Stay disciplined: Avoid reactive decisions during market fluctuations.

What makes index funds reliable?

Index funds track an index of assets (which is why they are often referred to as ‘tracker funds’). As long as they are managed correctly, their returns will always match those of this ‘benchmark’ index.

That makes them a relatively reliable way of gaining exposure to a given market or theme, as long as the underlying index is a good representation of the market. The fund manager will ensure that the mix of assets within the portfolio reflects those in the benchmark index.

This is in contrast to active funds, where the fund manager will proactively buy and sell assets into and out of the portfolio in an attempt to outperform the benchmark.

In theory, that means investors can realise higher returns by investing in active funds than index funds for equivalent sectors, but that often doesn’t happen in reality. AJ Bell’s latest Manager versus Machine report found that just 24% of active funds outperformed a passive alternative during the 10 years to 30 November 2025.

So if investors want to allocate a portion of their portfolio to match the returns of the global stock market, their most reliable option would be a global equities index fund (tracking, for example, the MSCI World Index).

Index funds are, however, subject to ‘tracking error’, which refers to the variance between their returns and those of the benchmark index.

“Investors should check how tightly the fund tracks its index,” says Dan Moczulski, managing director at eToro UK. “The lower the tracking error, the better.”

The most popular index funds to buy now

During the first two months of 2026, these were the most popular index funds among AJ Bell’s DIY investors:

^{Source: AJ Bell, Dodl. Based on net buys during January and February 2026.}

While the list includes two S&P 500 trackers and five global stock market trackers, there is also the L&G Global Technology Index Trust which is one example of how index funds can be used to gain exposure to a specific sector or theme. The fund tracks the FTSE World - Technology Index, and as such offers investors exposure to a global selection of technology stocks.

In popular folklore, October is the month of stockmarket crashes. That was true in 1987, when markets fell by a third in under a week, and in 1929, when the Wall Street crash marked the onset of the Great Depression.

But Yardeni Research reminds us that that is a myth. Statistically, September is the worst month for stocks and October only the seventh worst since 1950.

October is a turnaround month

Others observe that October is the “bear killer,” marking lows in 1974, 1990, 1998 and 2002. According to the Stock Trader’s Almanac, October turned the tide in 12 post WW2 bear markets.

“Mid-term election years usually see major bottoms in the fourth quarter”, it says, “and November is Nasdaq’s best month in mid-term years”. Furthermore, “the six months from November through April have generated an average return of 7.4% in the Dow Jones index versus a 0.6% average gain from May to October.”

The average performance over three, six and twelve months for the S&P 500 following the mid-term elections in the last 80 years has been 7.6%, 14.1% and 14.9%.

Perhaps a better description of October is that it is a turnaround month, bullish when the market has been weak in the year to date, bearish when it has been strong. October marks the month when, for better or worse, investors and analysts start thinking that corporate earnings for the current year are in the bag and next year is becoming visible.

If earnings are rising, the current year price/earnings ratio will drop in January and that can be anticipated in the fourth quarter, but if earnings growth is on the skids, investors realise that they have a year to wait before earnings recover or grow.

That makes the third quarter earnings reporting season, now underway, important. There was a fear that companies would be reducing expectations, perhaps sharply, in the light of the economic uncertainties of 2023 but that has not been the case.

Yardeni says that the reporting season “is off to the weakest start since Q1 2020” but revenues have still been 1.1% ahead of forecasts and earnings have beaten estimates by 5.7%.

Earnings are proving remarkably resilient

Moreover, year-on-year growth is still just about positive while, so far, there have been some notable positive surprises but no shocks, as there were earlier in the year.

Bank of America’s share price has risen 15% due to better-than-expected fixed interest trading resulting in earnings, though down 5% year on year, at the top end of expectations. “Our US consumer clients remained resilient with strong although slower spending levels and maintained elevated bank deposits,” it said.

More remarkably, Netflix, which severely disappointed the market earlier this year with news of rapidly slowing subscriber growth, has seen a remarkably quick turnaround in its fortunes. In the third quarter, it added 2.4 million paying subscribers, 1.4 million ahead of expectations; revenue rose 6% and margins reached 19%. The launch of its cut-price with-ads service is imminent, though that may cause some current subscribers to trade down. The shares jumped 13%.

Those predicting that Tesla will fall flat on its face will have been dismayed by a 56% year on year increase in revenue and an 85% increase in operating profits. We have yet to see whether an advertising slow-down is affecting Meta (Facebook) and Alphabet (Google) and much else besides but so far, so good.

Resilient profits will count for little if bond yields continue to rise but a current ten-year Treasury yield of 4.25% should be close to the top. The Federal Reserve is scheduled to raise interest rates by 0.75% to 3.75%-4% at the start of November and has indicated another 0.5% six weeks later. Growing evidence of an economic slow-down should persuade it to relent either later this year or early next.

A peak in bond yields, moderate valuations (15 times prospective earnings) and earnings that are better than feared should be a positive trigger for equities.

Equities still look attractive

Equities elsewhere on lower valuations look equally attractive; in Europe, the stockmarket has never been a proxy for economic activity, emerging markets have not been plunged into crisis by a soaring dollar and the Japanese market is cheap and has been resilient.

The only concern is the observation of Tan Kai Xian of Gavekal that “there is not enough fear to buy the dip”. Investor sentiment is very bearish, he says, but investors’ allocation to stocks hasn’t fallen as it did at previous turning points. “We are not yet at the point to prompt buying, but we are probably close,” he says.

Though the UK market is undeniably cheap on a single digit multiple of earnings, the economic outlook is deteriorating, gilt yields are still too low (they should be well above comparable US yields) and the chancellor has an almost evangelic obsession with raising already historically high tax levels in a futile attempt, encouraged by the Bank of England, to bail LDI pension schemes out of disaster.

The UK government’s view of the economy seems to follow Ronald Reagan’s dictum “if it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”

A very negative domestic outlook is clouding investors’ perception of the opportunities in the wider world but it shouldn’t. Investor pessimism in the UK has resulted in investment trust discounts, on average, rising from 1.5% to over 15% this year. This offers investors the opportunity to invest internationally on the cheap, with the discount providing a margin of safety if Gavekal is right and it is still a bit early.

Oil stocks are the biggest winners in the S&P 500, enjoying a rise of over 100% so far in 2022, according to data from online trading platform CMC Markets. If the upward trend continues, investors looking to take advantage of the S&P 500 best performers could do well from crude oil stocks.

Despite concerns around a global economic slowdown, the price of a barrel of Brent crude oil has been sitting around the $92 mark for some time now, and Opec+ announced a cut in production earlier this month that should ensure prices don’t fall again sharply even if major economies enter a recession.

We look at the best performing crude oil stocks in the S&P 500.

Best performing oil stocks

The best-performing stocks in the S&P 500 as of August 2022 were all oil stocks. Occidental Petroleum (NYSE: OXY) topped the chart, with a 126.8% share price gain in the 12 months to August.

Coterra Energy (NYSE: CTRA) and Hess (NYSE: HES) enjoyed gains of 61% and 51.9% respectively. Earnings for both companies reached new heights in the fresh half of 2022 as they both benefited from the fuel crisis in the US.

Exxon Mobil’s stock (NYSE: XOM) jumped 58.4%, benefiting from the increase in crude oil prices in the first half of the year.

Enphase Energy (NYSE: ENPH), which develops and manufactures solar panels and batteries, came fourth in the top five, benefiting from an increase in demand for solar power as energy prices soared throughout Europe.

Overall, oil and energy stocks’ success is probably due to surging energy prices in recent months and the maintained demand for crude oil, according to CMC Markets. In addition, some oil and gas companies “boast impressive dividend payments, which could have made them increasingly attractive to shareholders,” according to CMC Markets’ chief market analyst, Michael Hewson.

“It’s clear that these energy stocks are performing really well, as a direct result of what has been happening around the world over the last eight months,” he said. “However, because of this, it is not unlikely that these percentages will experience a drop-off by this time next year.”

The S&P 500’s worst performers

Many stocks that enjoyed great gains throughout the pandemic have struggled to maintain them. Tech companies in particular have suffered as investors worry that their good run might be over as life returns to normal. “People are back to travelling, socialising and commuting now, and this would definitely have had an effect on the stock price for certain companies,” said Hewson.

Netflix (Nasdaq: NFLX) is the biggest loser in the S&P 500, having dropped 62.7% so far this year. The company reported yesterday it had gained 2.4 million subscribers, which helped its share price. However earlier this year it warned subscriber growth had shifted into a reverse, which spooked investors.

Align Technology (Nasdaq: ALGN) saw a 57.2% dip in its share price. The company manufactures Invisalign, an “invisible” alternative to braces. Sales have dropped so far in 2022, which isn’t really surprising. The treatment is lengthy and costly, and consumers could choose not to invest in discretionary health products as they struggle with the rising costs of living.

Cruise operator Carnival (NYSE: CCL) has seen a 55% decline in its share price as it struggles to recover post-pandemic.

PayPal (Nasdaq: PYPL) came in fourth, possibly because its former CFO announced he was leaving the fintech firm for Walmart earlier this year which investors could see as a “possible threat to stability”.

Finally, Facebook’s parent company Meta Platforms’ (Nasdaq: META) share price declined 52.7%.

The US stock market has been the world’s top-performing market over the past decade.

Putting your money into a S&P 500 tracker fund would have given you around 15% per year in sterling terms (including dividends, before fees). Holding the MSCI World ex USA would have given you just 7%. Virtually nothing else would have come close.

Among developed economies, only Denmark returned around the same as the US stock market and that’s a tiny market driven by the success of insulin maker Novo Nordisk (50% of the index). Among major emerging markets, only Taiwan (powered by chipmaker Taiwan Semiconductor Manufacturing) and India even got into double-digit annual returns.

Very few international investors would have been solely invested in the US stock market. Yet at least tracking the MSCI World index, instead of trying to be smart by overweighting cheaper markets elsewhere, was the clever choice in hindsight.

How the US stock market beat the world

Whether US stocks do the same this decade really depends on whether the past decade was down to stronger growth, higher margins or stocks re-rating onto higher valuations – and whether those trends can continue or whether we should expect them to revert back to long-term trends.

Over the ten years to the end of July, US valuations contributed far more to returns than any other region, according to data from asset manager WisdomTree.

The S&P 500 returned 13.8% per year up to that point in US dollar terms, of which 3.83 percentage points was due to valuation multiple expansion (ie, higher price/earnings ratios). European stocks saw valuation changes provide 1.39 percentage points of growth, while valuation changes in Japan actually detracted from returns because multiples shrank.

Profit margins grew in both the US and Europe at a similar rate, contributing 3.5 percentage points to returns. US companies tend to have higher margins than the rest of the world – which all being equal means they may deserve higher valuations – but they didn’t expand margins notably faster then European ones.

On the other hand, Japanese margins expanded hugely, adding 8.9 percentage points to returns. The bull case for Japan – that companies could improve profitability – has worked out (helped by the weak yen), yet valuations didn’t grow.

Lastly, what about growth? US companies grew sales much faster than anywhere else, contributing 4.6 percentage points to returns. Japanese companies grew about half that, again helped by the yen, while European sales barely increased at all.

US stocks could hit turbulence

In short, pretty much everything worked in the favour of the US stock market over the past decade (including the strength of the dollar).

Some of these factors probably will do again. But it’s hard to see valuations expanding more if the US is tightening policy faster than the rest of the world.

That will be a substantial headwind, meaning the US stock market is unlikely to repeat its spectacular outperformance over the next decade.

“The world has been hooked on cheap money for years. Now we’re witnessing what withdrawal looks like,” says Randall Forsyth in Barron’s.

Last week, central banks from Scandinavia to Mongolia and from South Africa to Indonesia raised interest rates. America’s Federal Reserve delivered its third successive three-quarter point interest-rate hike, while the Bank of England raised interest rates by half a percentage point to 2.25%. Switzerland became the last European central bank to end its experiment with negative interest rates, leaving Japan as the only big economy where rates are still below zero.

Markets have swooned, with America’s S&P 500 stock index falling to its lowest level of the year so far on Monday. Oil prices have hit their lowest level since January on expectations of weaker demand.

Bond-market pain

“We’re living through… the most truly global attempt to tighten financial conditions in memory,” says John Authers on Bloomberg. “With 2022 not quite three-quarters over, this is already the worst year for [US Treasury] bond investors in six decades.” The yield curve, a measure of the gap between yields on US ten-year and two-year government bonds, has reached its steepest inversion “in more than 40 years”. Previous inversions have heralded a recession.

It has been clear for some time that monetary policy would need to tighten, but traders are only slowly waking up to the implications for overpriced equities, says James Mackintosh in The Wall Street Journal. “Markets are doing what they always do, hoping against hope that there’s no recession, or at least a very mild one, right up to the last minute.”

Fed policymakers have made clear that more hikes are in the pipeline, says Aaron Back in the same paper. Fed chair Jerome Powell describes the US labour market as “extremely tight”, a sign that the economy is still running too hot. US central bankers want “to see the economy slow significantly, even if that involves some pain”. Yet the bulls may still have a point: “the inflation... Powell is contending with isn’t nearly as entrenched as that of the 1970s. So a recession isn’t a sure thing and, if there is one, it might not be very deep or prolonged by historical standards”.

Investors are struggling to accept that their lost wealth isn’t coming back any time soon, says Katie Martin in the Financial Times. “The five stages of grief are denial, anger, bargaining, depression and acceptance.” Markets spent much of the summer in bargaining mode, when they “briefly took seriously the notion that central bankers might be gentle with rate rises”.

The current mood in stocks is somewhere between depression and acceptance. The latest round of global rate rises “has demonstrated, as if it were not already obvious, that declines in asset market valuations are simply not going away”.

These are incredibly challenging markets. It seems as if investors and traders have made up their minds that asset prices are going lower. Every time a piece of news emerges, no matter how bad or good, the selling begins.

How should investors react to this environment? In my opinion there is no clear answer.

In times like these, many market commentators and analysts will roll out the common refrain that holding on is the best way to manage volatility as asset prices always recover in the long term.

While this is correct, I think the advice is often misleading. It’s true there is a high probability markets will be higher in ten years than they are today, but this refers to the stock market in general.

The only way to replicate this performance would be to own an index tracker fund. It’s not necessarily true of individual investments or even active investment funds.

Picking winners is always going to be a challenge

Multiple studies have shown that in the long-term the vast majority of market returns come from just a handful of stocks. These companies perform so well they more than make up for the drag of underperformers.

The chances of finding these companies is tiny. By one estimate, just just 4% of stocks in the S&P 500 account for more than 90% of its returns. Flip that figure on its head and you get a 96% chance of picking the wrong stock.

This is the reason why I think it’s a mistake to subscribe to the mentality that the best course of action in uncertain times is to do nothing.

Some companies will not emerge from the current economic storm in one piece.

Other companies will emerge stronger.

Investors need to have an honest discussion with themselves about whether or not the enterprises they own in their portfolio have what it takes to survive and thrive over the next year and beyond.

Indeed, in the UK we face a unique set of economic circumstances. As well as the energy crisis, the country is also dealing with the disruption of Brexit and political uncertainty.

Other countries have their own unique problems. The risk of blackouts in Europe over the winter is growing, and the chances of another debt crisis in Italy are also building.

Meanwhile, the US is struggling with runway inflation, ageing infrastructure, political roadblocks and a surging dollar, which is likely to hit corporate earnings.

Every market has its own strengths, weaknesses, opportunities and threats. Navigating all of these is going to be a challenge. There’s just no sugar coating that fact.

There’s no sense kidding yourself

This is why investors need to be honest and realistic about the holdings they own. I believe the companies with the best chances of being able to chart a course through this storm are the ones plugged into multi-decade macro themes, think healthcare, cloud computing, fintech, luxury goods and data.

The companies that are likely to struggle are those in sectors exposed to the economic cycle and disruption, such as industrials, brick-and-mortar retail and potentially even oil and gas (yes you read that right).

Oil and gas groups are awash with cash today, but they’re still exposed to a range of risks. These include windfall taxes, environmental levies and regulation. The current energy crisis could also accelerate the transition to green energy, which could lump them with tens of billions of pounds in stranded assets (I said this was a challenging time to be an investor).

Unfortunately, renewable generators are just as exposed to windfall taxes and additional regulation.

In these markets investors need to choose which risks they’re most comfortable with taking, and most importantly try and keep a balanced view on the world. The outlook for the global economy might seem awful right now, but as history shows, periods of economic stress are usually followed by growth and prosperity. Finding the companies that can make it through, and come out on the other side ready to take advantage of the opportunities on offer is vital.

There’s no sense hanging on to businesses that are really struggling and on the verge of collapse in the hopes they’ll be able to turn it around.

The world is changing and investors need to appreciate this fact. As the economist and investor John Maynard Keynes once said, “When the facts change, I change my mind - what do you do, sir?”

“The extreme pessimism of the first half of 2022 seems a distant memory” on Wall Street, says Nicholas Jasinski in Barron’s. “War in Europe, runaway inflation” and “a behind-the-curve Federal Reserve” saw US stocks suffer their worst first half in more than 50 years.

Yet the S&P 500 index gained 17% between its June lows and 16 August, while the tech-heavy Nasdaq rose more than 20%, a milestone widely considered to herald a new bull market. The FTSE 100 rose 7% over the same period.

Why confidence has grown

This summer’s rally has proceeded in two stages, says Thomas Mathews of Capital Economics. “Until early August” it was driven by “unwinding of expectations for Fed rate hikes” amid bets that a slowing economy would soon show inflation the door. Since then, growing confidence that the US is heading for a “soft landing” in the wake of solid corporate results and continued strength in the jobs market has kept the bulls running.

“The S&P has retraced 50% of its losses from the 3 January high to the 16 June low,” says Bob Pisani for CNBC. That has encouraged some to argue that the bear market is over. “History reminds us that the S&P 500 never set a lower low in any post-World War II bear market after recovering 50% of that peak-to trough decline,” says Sam Stovall of CFRA Research.

There are other reasons to hope this rally might stick, says Tom Stevenson in The Telegraph. Rather than being driven by the technology and growth stocks that led the post-pandemic upswing, market leadership has shifted towards “utilities, energy and dividend paying shares”. That makes this feel like a fresh bull market rather than a rehash of the last one.

On the other hand, this summer’s rally has brought renewed interest in meme stocks such as Bed Bath & Beyond, a market mania with a distinctly 2021 flavour. Speculative options trading, “a popular vehicle for retail investors looking to place leveraged bets in hopes of outsized gains”, has also made a return, says Saqib Iqbal Ahmed on Reuters. Ten-day average daily trading volume of single stock options is “at a more-than six-month high”, according to data from Trade Alert.

Investment bank traders warn that the bounce has been “driven by hedge funds unwinding bearish bets”, say Eric Platt and Ortenca Aliaj in the Financial Times. This summer’s rally has forced hedge funds to cover “short bets” they had made earlier this year, but that doesn’t suggest there is much “conviction” around that this is a new bull market. “There is no real follow-up from long-only or fundamental buyers, who are largely on the sidelines,” says Justin Cummings of Savoy Capital.

Investors seem to be pricing in a lot of good news, says The Economist. “Inflation is far from being vanquished” and the Fed, “having been late to react to the inflation surge… is unlikely to turn on a dime”. China’s economy is slowing and Europe is heading for a gloomy winter. And as experienced investors will tell you, “most past market downturns included plenty of breathtaking bear-market rallies before... prices resumed their downwards march”.

Index funds, also known as tracker funds or passive funds, offer all sorts of benefits to investors.

While actively-managed funds can often incur high management fees for the supposed expertise of the fund manager, index funds are a low-cost alternative that offer investors convenient access to a sector or geography.

Some of the top funds that investors choose are, unsurprisingly, index funds – especially as passive funds often outperform their active counterparts.

“There is a high rate of underperformance for active investing strategies so there is a persuasive school of thought that investors should just aim to maximise returns by minimising costs with inexpensive index funds,” Rob Morgan, chief investment analyst at online investing platform Charles Stanley Direct, told MoneyWeek.

“They represent a particularly good strategy for areas where portfolio managers consistently struggle to beat the market index – often large, well-researched markets. The US market is a prime example, and investors will have done well in recent years simply to buy an S&P 500 tracker,” Morgan added.

Index funds can typically offer low costs (as well as low transaction fees due to low turnover).

Here, we’ll explore some of the tracker funds available to UK investors that carry the lowest ongoing fees, as potential low-cost additions to your portfolio.

What are index funds?

An index fund replicates the performance of a major index, like the FTSE 100 in the UK or the S&P 500 in the US.

“They do this by simply buying the same (or at least very similar) mix of investments as the index they track,” said Morgan.

“Rather than trying to beat the market, index funds simply aim to replicate it,” said Chris Beauchamp, chief market analyst at online investing platform IG. “They hold the same securities as the index they track, in the same proportions, so when the index rises, so does the fund, and vice versa.”

Low costs and more: what are the advantages of index funds?

The active versus passive investing debate is age-old. In theory, a skilled active manager will pick and choose stocks that will outperform the broader market benchmark (usually an index that a tracker fund will follow).

In reality, however, beating the market is difficult and the majority of active funds not only fail to do so but also significantly underperform. That, coupled with the fact the fees on active funds are almost always higher, means they can be an inadvisable way to invest in the stock market.

“Low costs are the headline advantage [of index funds], as annual charges are typically well below 0.5%, compared to 1%+ for actively managed funds,” said Beauchamp. “Over time, that difference compounds significantly.”

AJ Bell’s latest Manager versus Machine report, released in December 2025, showed that less than a quarter (24%) of active funds outperformed a passive alternative over the 10 years to 30 November 2025 – the lowest that metric has been since AJ Bell started running the report.

“There’s no dressing it up, it’s quite simply been a dreadful decade for active fund managers,” said Laith Khalaf, head of investment analysis at AJ Bell.

^{Source: AJ Bell and Morningstar, total return in GBP to 30 November 2025.}

Index funds aren’t just lower-cost alternatives to active funds, but they have also generated higher returns in recent years.

They are also “simple to understand, easy to buy, and inherently diversified, owning a slice of every company in an index rather than betting on individual stocks”, adds Beauchamp.

What are the disadvantages of index funds?

One of the obvious drawbacks of index funds is that, while they won’t underperform it, they won’t outperform the index they are tracking. Actively managed funds, by contrast, have the potential to beat their benchmark.

They also potentially expose investors to concentration risk, given that market cap-weighted indices become concentrated in the largest stocks.

“It is worth noting that the huge rise in the share prices of a cluster of large tech and e-commerce businesses has overwhelmingly driven the US market over the past decade,” said Morgan.

“Given the now-concentrated nature of these indices, should these stocks have a tougher time, a standard US or global index fund could struggle. You could say that investing in the US market passively has rarely been as concentrated, and therefore as risky, as it is today, and the more diverse approach of an active fund could help temper this.

12 low-cost tracker index funds to consider

Here, we’ve picked out a (non-exhaustive) selection of some low-cost index funds and exchange-traded funds (ETFs) that highlight the different kinds of exposure index funds can offer.

This information does not reflect all the fees and charges (as well as discounts) that might apply through different brokers.

^{*To 26 February 2026, via Fefundinfo}

Beauchamp highlighted VWRL, calling this “a genuine one-stop-shop for diversification” given the broad exposure across developed and emerging markets it offers by tracking the FTSE All-World Index.

^{*To 26 February 2026, via Fefundinfo}

^{*To 26 February 2026, via Fefundinfo}

^{*To 26 February 2026, via Fefundinfo}

Finding the best dividend stocks to beat inflation isn’t as easy as it sounds. But owning income shares with prices rising could be a sensible decision for investors.

According to research from Goldman Sachs, during periods of high inflation (greater than 5%), dividend stocks tend to do better than the wider market. The investment bank’s research is based on data for equities in the S&P 500 index going back to 1940.

A deeper look into the data only reinforces this conclusion. In the 1970s, a period of very high inflation in the US, the S&P 500 delivered total returns of 77% of which three-quarters was attributable to dividends and dividend reinvestment.

The data also shows that dividends can be an important component of total returns even in a low-inflation environment. Dividends and reinvested dividends have made up about half of the total returns of the MSCI AC World Index over the past two decades.

However, not all income stocks are created equal. Some companies are better positioned to deal with pricing pressure than others. Here are five dividend stocks that look best-placed to deal with rising inflation.

Dividend stocks to beat inflation

At the top of the list is FTSE 100 beverages giant Diageo (LSE: DGE).

Companies with the most pricing power are in the best position to pass on rising costs to consumers, and there are few corporations in the FTSE 100 with the same kind of pricing power as Diageo.

The company’s portfolio of brands, which includes premium and non-premium products such as Guinness, Smirnoff Vodka and Johnnie Walker whisky, means it has distribution across a number of price points and international markets.

With its substantial economies of scale and buying power, Diageo also has some of the best gross profit margins in the FTSE 100 providing a high level of protection against inflation to the firm’s bottom line. Companies with fatter margins are better positioned to absorb higher costs.

These qualities help Diageo stand out to me as being one of the best dividend stocks to beat inflation despite growing economic headwinds. The stock offers a 2.2% yield.

Rising commodity prices are driving inflation

Rising commodity prices are one of the main reasons why inflation has exploded over the past couple of months. One of the main beneficiaries of this boom is Glencore (LSE: GLEN). The miner and commodity trading house is virtually unrivalled in terms of size and scale in this market. It has access to information and pools of capital other companies can only dream of.

With its vast resources, it is able to take advantage of commodity pricing differentials in markets around the world. For example, if it can buy coal for $100 a tonne in one country and sell it in another for $105, Glencore will do just that.

With trading profits booming, Glencore thinks it will earn $3.2bn from its trading business this year, that’s at the high end of management’s expectations. And the longer these commodity market disruptions last, the longer the group will be able to earn abnormal profits.

Glencore has shown a willingness in the past to return excess profits to investors when it can, and that’s what analysts believe it will do this year.

Refinitiv analyst estimates have the stock yielding 8.9% this year and 8.5% in 2023. Additional cash returns could be on the cards in the form of buybacks as the company continues to earn bumper profits.

A dividend champion rising from the ashes

A company that might not be the first point of call for investors looking for income stocks to beat inflation is Phoenix (LSE: PHNX). This firm manages pension policies for over 13 million customers with just under £270bn of assets between them.

Phoenix has grown by acquiring books of closed pension policies, which other companies are trying to offload. By aggregating these assets, the group can streamline operations, reduce costs and earn a return on investment. It also branched out into the more conventional retirement savings market with the acquisition of Standard Life Aberdeen's insurance arm in 2018. Today, this is a key area of growth for the business.

Unlike other peers in the sector, such as Aviva (LSE: AV) and Legal & General (LSE: LGEN), Phoenix does not offer general insurance on cars or properties. Instead, it focuses exclusively on managing pensions and long-term savings products.

This focus on one product line (the group is also almost entirely based in the UK) might put some investors off from owning the stock. While I understand this viewpoint, I also think this business has some great qualities for an inflationary environment.

Phoenix does not manage the assets it holds to meet liabilities itself. It outsources this work (to keep costs low) and the managers have a mandate to invest these assets to deliver predictable returns. That’s very important when you’re talking about people’s life savings.

The company also hedges its business against inflation. In its latest results release the firm stated that the current inflationary pressures will have no material impact on its financial performance.

All of this means Phoenix has the hallmarks of a stable and predictable business, with stable and predictable cash flows. Indeed, management has calculated that the firm can generate £17bn of cash over the coming years. After stripping out expenses and other costs, the group reckons it will have £12bn of available cash to return to investors (excluding the impact of any acquisitions).

The stock currently yields 7.9%.

Defensive dividend stocks to beat inflation

A recurring revenue stream is a great advantage for any business, even more so if growth is built into that income stream. Long-term commercial rental contracts are a great example of repeat revenue streams and most commercial leases have clauses allowing for rents to be reviewed at regular intervals. This is very valuable in an inflationary environment.

Primary Health Properties (LSE: PHP) owns hundreds of medical facilities, mainly health centres and GP surgeries across the UK and Ireland. Five-year rent reviews are built into most of the company’s leases and the majority of its revenue comes from government agencies. I don't think you could find a more secure, inflation-proof income stream than that.

Structured as a real estate investment trust (Reit), Primary Health supports a dividend yield of 4.6%.

A defensive play with inflation-beating credentials

Utility Severn Trent (LSE: SVT) benefits from both an inflation-linked recurring income stream and a unique asset base that will only grow in value as prices rise, two qualities that make it stand out as one of the best dividend stocks to beat inflation.

Inflation will increase the value of the firm’s assets, such as pipes and treatment plants, which are costly and time consuming to replace.

What’s more, inflation will also reduce the value of the group’s debt in real terms. That should lead to an overall improvement in net gearing. Net gearing currently stands at around 60%, and 69% of this is fixed-rate borrowing.

The company is regulated by Ofwat, meaning it cannot raise prices as it sees fit, but the regulator is still allowing for growth. Severn Trent is offsetting higher costs elsewhere through cost-saving measures such as energy self‑generation, which now meets 50% of its needs.

These measures should allow the business to continue to grow its payout throughout the rest of the current regulatory period, which lasts until 2025. The stock offers a dividend yield of 3.6%.

Disclosure: Rupert Hargreaves owns shares in Diageo and Phoenix Group.

“Fear of missing out” has replaced “fear of delusional analysts” according to strategist Ed Yardeni. The rally in equity markets that started in mid-June, dismissed as a “dead cat bounce” by the numerous bears, gathered momentum in July with the MSCI All Countries World index returning 5.4% in sterling.

What makes it worse for the bears is that the parts of the market they disdain most – growth shares in general and technology related shares in particular – have led the rally.

The supposedly overvalued US market is 13% above its mid-June low, having risen 9% in July. The rally is broad based, extending to small and mid-cap stocks; investment trust discounts, which exceeded the 10% level rarely surpassed since 2009, have started to fall.

Where do we go from here?

The best answer is the proverbial Irish one: “if I were you, I wouldn’t start from here.” The bears believe that this is the calm before a second storm in which markets, especially the US, will plunge to new lows. The bulls think that markets will look through the bad news to better times ahead.

Yardeni points out that valuation multiples for the S&P 500 have rebounded from 15.3 times forward earnings in mid-June to a current 17.2, assisted by a fall in the yield on ten year Treasury bonds from 3.5% to 2.7%. Analysts are shaving their earnings forecasts, though second-quarter earnings have comfortably exceeded expectations.

After two quarters of negative growth, the US economy is in technical recession, though Yardeni expects it to be short and shallow. Meanwhile, rising markets have made investors less pessimistic about the outlook, which removes the contrarian “buy” signal.

The bearish argument is that inflation is embedded in the global economy, that interest rates will have to rise much further than expected, causing a deep recession which will result in a sharp fall in corporate earnings. Bond investors are far too complacent about inflation and the market-implied rate in the US over the next ten years – the 2.3% gap between yields on conventional and inflation-indexed bonds – is far too low.

In the UK, Bank of England governor Andrew Bailey warns of a long recession lasting five quarters, starting in the last quarter of 2022, with the economy shrinking more than 2%. Household post-tax income is forecast to fall by 5% as inflation reaches 13% by the end of this year and stays at “very elevated levels” throughout 2023.

The consensus forecast is for economic growth of 1.3% in the US and 1.7% in the eurozone but, presumably, the Bank of England doesn’t believe these. There have been dire warnings about the economic consequences of further cuts in Russian gas supplies to Europe this winter and fears of a euro crisis have resurfaced but European and British businesses should benefit from a strong dollar. The consensus forecast for the US looks, if anything, too low.

Things might not be so bad

The Monetary Policy Committee is more nuanced, saying that uncertainty around the outlook is exceptionally high and that a fall in energy prices could result in a more mild recession. A more critical response to the Bank of England would be that its forecasts have been even worse than those of SAGE during the pandemic; certainly, there are question marks over its latest forecast.

Why the UK economy should perform so much worse than the US or Europe is not clear. The oil price has fallen to $89 a barrel for West Texas and $94 for Brent crude, probably due to a combination of sanctions against Russia not working, extra output from elsewhere and weaker demand. Gasoline prices in the US have fallen by 17%, according to Yardeni, from a peak of $5.02 a gallon and natural gas prices will surely follow. Lower petrol and gas prices will certainly help disposable income.

The tax cuts promised by Liz Truss as prime minister will also support household income in the UK as is the continuing high level of employment. If the Bank of England was intending to raise interest rates to the levels that would cause a recession, it would surely have already raised them beyond 1.75% by now. The Bank of England’s forecast of a lengthy UK recession is implausible.

In any case, any under-performance of the UK economy relative to other developed countries would have negligible implications for global stockmarkets. The bearish argument for these is that corporate earnings will fall precipitously and stay down. The bull argument is that any fall will be modest and that investors, as usual, will look through it to subsequent recovery.

That has been evident in the market’s response to poor quarterly numbers from Netflix, Meta and Alphabet, whose share prices have risen despite poor numbers as an increased focus on profits and cash flow has become apparent.

The world will muddle through

To the surprise of the bears, the market has also responded well to higher interest rates. Investors have cheered the commitment of central banks to fight inflation, especially in the US where the Federal Reserve has been much more determined than the Bank of England. The market, it seems, was not being propped up by ultra-low interest rates after all.

It is also notable that the market rally and coincident fall in commodity prices has coincided with Ukraine gaining the upper hand against Russia. The common assumption that the war and its implications for the supply and prices of commodities such as metals, oil, gas and food will be never-ending may prove misplaced.

Inflation may be a persistent problem in the UK (though the Bank of England’s restated commitment to a 2% rate in two years is encouraging) but pressures in the US are more clearly abating. Maybe the onset of winter in Europe and the UK will not be the disaster universally predicted. Maybe complacent companies will continue to be galvanised into innovation, focusing their businesses and defending profits and cash flow. There is scope for positive surprises as well as negative ones.

The most likely outcome to the myriad worries is that economic and geopolitical Armageddon will be avoided and the world will continue to muddle through. Those who missed the market lows in mid-June will not get a second chance but that is not a reason to rush in now. The upward path is likely to be erratic and punctuated by setbacks.

The problem for would-be buyers is that there are plenty of other investors waiting to buy. It is better to jump in early at the risk of some short term downside than to wait on the sidelines waiting for the mythical perfect opportunity.

Recession? What recession? The US economy shrank at an annualised pace of 0.9% between April and June, its second successive quarterly contraction. In many countries that would meet the definition of a recession, but with unemployment close to a 50-year low and two vacancies for every jobseeker in May, the White House has rejected the label. “That doesn’t sound like a recession to me,” says president Joe Biden.

“The official designation is determined by eight economists” at the National Bureau of Economic Research, who also look at measures of jobs growth, income and spending to make a recession call, say Nicole Goodkind and Tal Yellin for CNN. They don’t think this slowdown qualifies.

Beyond the technical arguments, “what’s clear to everyone is the economy is slowing, prices are rising at their fastest pace in decades, and the housing market has started cooling as the Fed raises interest rates aggressively”, says David Gura on National Public Radio. Around 65% of US voters think the country is already in recession.

Investors are too bullish

That hasn’t dampened investors’ spirits, however. The S&P 500 plunged 21% in the first six months of the year, but rallied 9.1% in July for its best monthly showing since November 2020, say Kate Duguid and Naomi Rovnick in the Financial Times. The tech-heavy Nasdaq Composite index gained 12.3%. Last week the US Federal Reserve hiked interest rates another three-quarters of a percentage point to a range between 2.25% and 2.5%. Yet investors increasingly think that a weaker economy will cool inflation and see the Fed relent fairly soon, says John Authers on Bloomberg. “That’s an unlikely scenario” that suggests a misplaced confidence in the Fed’s ability to manage the inflationary storm without reducing corporate earnings. July’s gains look like a bear-market rally, a moment when “it appears that all the selling is over and that it’s safe to take risks once more”, only for markets subsequently to plunge once again.

Bear-market rallies are not uncommon, says Robert Armstrong in the Financial Times. “I count four or possibly five in the 2007-2009 downturn.” There were also “three big ones, all of around 20%, interspersed within the 2000-2003 crash”. While this rally principally reflects “a softening of inflation” and interest-rate expectations, investors also appear to think that the US is heading for “either a shallow recession or no recession at all next year”.

Wall Street is being unduly optimistic, says Russ Mould of AJ Bell. Analysts are still forecasting increases for overall S&P 500 earnings in 2022 and 2023. That looks a “stretch” given soaring inflation and “sagging growth”. Note that “US corporate profits stand at record highs not just in margin and absolute dollar terms, but also as a percentage of GDP”, leaving limited room for further progress. While US valuations have come down this year, they still look expensive on the crucial cyclically adjusted price/earnings (CAPE) gauge. “Any time the CAPE ratio has stood at the current level, subsequent ten-year compound returns from US equities have invariably been negative.”

The FTSE 100 is only a few percentage points up since its dotcom peak in December 1999, says James Yardley in the i newspaper. London is starting to resemble the similarly “hated” Japanese equity market, says Steven Andrew of fund manager M&G. “Places get this reputation from investors because they don’t make lots of money and they can be a bit dangerous if you own them at the wrong time.”

“For all the criticism aimed at the UK benchmark,” note that “the FTSE 100 has delivered an average annual total return of 7.75% since its inception in 1984,” says Investors’ Chronicle. True, that lags America’s S&P 500, but “it’s easily more than double the average UK inflation rate over the same period”.

What’s more, the London blue-chip index has been the best-performing major stock index so far this year (it has gone nowhere, while other global markets have plunged). “There is a certain irony in that the much-derided composition of the FTSE 100 is the main reason why it has held up reasonably well over the past six months or so.”

The FTSE 100’s weighting towards energy, mining and banking stocks have made it a refuge in the inflationary storm. By contrast, the FTSE 250, down almost 16% in 2022, has struggled owing to its greater weighting towards more cyclical industrial and consumer shares. The FTSE 100 bucks weakness in the UK economy because 80% of its earnings come from overseas. Analysts at Link Group think that sterling’s weakness should provide a £3.5bn-£4.5bn boost to total dividends this year; dollar earnings are inflated when translated into a weaker pound. A strong showing from miners helped push UK payouts to £37bn in the second quarter, the second highest figure on record. Link Group now expects headline payouts to climb by 2.4% in 2022 to £96.3bn.

“On a relative basis… British shares are incredibly well placed because we never had the bubble that America had,” Richard Buxton of the Jupiter UK Alpha fund told Danielle Levy in The Daily Telegraph. “We have some great companies… which are pretty cheaply valued. British shares offer a place to hide in difficult times in financial markets.”

Traders dislike Truss

The UK market could yet be heading for the odd bout of turbulence if Liz Truss is the next prime minister, however. “Truss’s policy platform… poses the greatest risk from an economic perspective… with an unseemly combination of pro-cyclical tax cuts and institutional disruption,” according to Ben Nabarro of Citigroup.

Truss is considering reviewing the Bank of England’s mandate to ensure it is tough enough on inflation, although she says this should not threaten its independence. The more predictable Rishi Sunak is the market’s favourite.

When the UK voted to leave the European Union in June 2016, it had one very obvious and dramatic effect – the drop in the value of sterling. Whatever your view on Brexit or its potential long-term disadvantages and advantages, the immediate impact on investors (sterling’s collapse) was pretty clear.

To some extent, UK investors were insulated from these economic challenges. Weaker sterling pushed up earnings for international companies and helped exporters. More than 70% of FTSE 100 profits are generated outside of the UK and over the past ten years this index has produced an average annual total return of 6.5%.

The FTSE 250 index has also performed particularly well, returning 8.3% over the past ten years on a total return basis. These figures suggest investors have seen real annual returns of 4.7% and 5% per annum respectively.

But even these figures pale in comparison to the rate of return UK investors would have been able to achieve investing in US stocks. An investment of £1,000 in a low-cost S&P 500 tracker fund would have grown at a compound annual rate of 15.6% over the past ten years thanks to a combination of the stronger US equity market performance and sterling’s devaluation.

Why am I bringing up this example right now? Because I believe it clearly illustrates why investors need to have some exposure to international markets, regardless of how comfortable they are with their home market. Too much exposure to a home region can bring unnecessary risks – the immediate effect of Brexit being an excellent illustrative example.

The outcome of the referendum was unknowable until the day after it happened. And once the results came through, investors had little or no time to re-position before the pound slid.

We had a similar event earlier this year. In the space of a few days the outlook for European economies deteriorated rapidly overnight when Russia invaded Ukraine. High oil and gas prices are sucking money away from energy importers to exporters (the UK is relatively self-sufficient in this respect with around half of its natural gas consumption coming from the North Sea), causing pain around the world. This only adds weight to the diversification argument.

It does not pay to have all of your eggs in one basket

The aim of international diversification is not necessarily to try and bet which country is going to succeed or fail over the next decade. Trying to predict these sorts of macroeconomic events is almost impossible.

One of the greatest advantages private investors have is the fact that we can invest anywhere in the world, in any opportunity where we believe there’s money to be made. And some countries do things much better than others.

While the UK might be a science and pharmaceutical superpower, America clearly has the edge when it comes to global technology giants. The US market is dominated by technology companies while one of the biggest sectors in the FTSE 100‘s resource stocks. There are also attractive opportunities in Europe in the pharmaceutical sector and luxury goods. Meanwhile, there are far more semiconductor manufacturers listed in Asia than there are in the West.

There is far more to international investing than just trying to pick which countries will succeed or fail over the next five or ten years. It’s really about picking the best companies in the world. If they are part of an economy that happens to outperform the rest of the world, then that’s an added bonus.

If I have to choose between picking the best tech company in the world listed in the US and the second-best in the UK, why would I pick the second best? It does not make any sense.

However, I would caution against international diversification for international diversification’s sake. For example, there’s really no sense in buying Brazilian stocks just because I have too much exposure to North American equities. The most important part is finding the right opportunities.

I personally wouldn’t invest in any South American markets because I’m not comfortable with the level of protection given to international investors, though you may differ. Instead, I focus on finding the best companies in markets I understand, mainly Europe, the UK and North America.

The barriers to entry are always getting lower

The barriers to international investing are no-longer as high as they once were either. Most online stockbrokers now offer international equity dealing for the same price as UK stocks and shares. A few are holding onto antiquated ways of charging over the odds for international deals, but with so much choice on offer, investors don’t need to use these brokers.

And if you’re not comfortable picking stocks in other markets and currencies, there’s always the option of buying an index tracker fund or investment trust with international exposure.

“Growth is slowing fast, inflation is stubbornly high, and central banks are on the warpath,” say Ajay Rajadhyaksha and Amrut Nashikkar of Barclays. As the world economy enters the second half of the year, “the macro outlook is gloomy”.

Following two years of “chaos” in the pandemic, 2022 was always going to be “a bumpy ride, but nobody expected this – the most turbulent first half global markets have ever seen”, says Marc Jones on Reuters.

During the first six months of the year world stocks saw $13trn wiped off their value, while ten-year US Treasury bonds – a traditional safe-haven – suffered “their worst first half since 1788” after dropping more than 13%. That is better than some other debt: “Italy’s bonds have haemorrhaged 25%” amid fears of a new eurozone crisis.

Volatility has returned, with the Japanese yen plunging 15.5% and commodities serving up their strongest rally since World War I.

Bruised and anxious

“Financial markets enter the second half of 2022 bruised and anxious,” says the latest strategy outlook from investment manager Gramercy. Soaring inflation comes at a time “when many countries’ resilience has already been heavily taxed” by Covid-19.

The current cocktail of “lower growth, higher inflation, tighter financial conditions, a stronger dollar, and recession risk” is especially toxic for the developing world, where currency turmoil and “debt restructuring” could be in the pipeline. Emerging-market debt is down nearly 20% so far this year.

US stocks suffered their worst first half since 1970: the S&P 500 benchmark tumbled 20.6%. The tech-heavy Nasdaq Composite fell 29.5% for its “worst first half of a year on record since its inception in 1971”, says Evie Liu in Barron’s. The fall has beaten even “the 25% drop in the first half of 2002 at the height of the dotcom bubble burst”.

A sell-off that started in tech has since spread to other sectors: ten out of 11 US sectors are down this year. The exception? Energy stocks, up 28% due to soaring oil prices.

London’s heavy weighting towards energy and commodities has helped the FTSE 100 avoid the worst. It finished the first half down 4.5%, better than almost every other global market. But with the more domestic FTSE 250 losing more than 20%, the first half was still a mixed bag overall for UK investors.

Is the inflation panic over?

“Inflation almost seems passé. The worry of the moment is now economic growth,” says John Authers on Bloomberg. Central bankers have made it clear that tackling inflation is now their “overriding priority”. They appear willing “to force a recession to get rid of inflation”.

The outperformance of value stocks compared with growth stocks – a key theme earlier this year – has halted in recent weeks, says Robert Armstrong in the Financial Times “This is consistent with recession fear”. Cheap stocks are in the “cyclical, highly leveraged… highly competitive industries” that suffer most in a recession. Halfway through 2022, battered investors are “increasingly defensively positioned”, but have yet to succumb to outright panic.

Research shows that stocks with dividends tend to outperform the market over the long run, especially in periods of macroeconomic turbulence.

According to a study conducted by US-based asset manager Hartford Funds, between 1930 and 2019, dividends contributed 42% of the S&P 500’s total return between 1930 and 2019 – that’s roughly 1.8% a year on an annualised basis (I’m using the widely-followed US large-cap barometer here, as it reflects a much broader selection of global stocks compared to the UK’s market indices).

The headline figure masks more varied underlying returns. For example, during the 1940s, ’60s and ’70s, Hartford’s research showed that dividends contributed as much as 73% to the total return achieved on equities.

However, another study, this time performed by US-based asset management firm Wellington Management, showed that there’s more to dividend investing than just buying the market’s highest-yielding equities.

Wellington divided income stocks into quintiles (fifths) according to their level of dividend payouts. The first quintile, the top 20%, made up the highest dividend payers, while the fifth quintile comprised the lowest payers. The asset manager found that stocks falling into the second and third quintiles outperformed the highest-yielding equities.

In other words, while dividend stocks do tend to outperform over the long-term, looking at a company’s yield alone in isolation is a mistake.

The easiest way to find the best stocks with dividends is to screen for companies with a high level of dividend cover. This is calculated by dividing earnings per share by its dividend payout per share. When the ratio is above two, it can be a sign that the business’s dividend is well covered by earnings. A ratio below one can be a sign the payout is unsustainable.

But there’s no one-size fits all strategy for analysing income stocks. I like to use an approach that incorporates several different metrics to assess an organisation’s financial health and future dividend prospects.

A strategy to find the best stocks with dividends

A company’s ability to return excess profits to investors is essentially determined by three factors: its profit margins, its need for reinvestment, and its balance sheet.

Companies with larger profit margins have more freedom to invest back into the business and return money to investors. Meanwhile, organisations with strong balance sheets don’t need to worry about holding cash back to meet upcoming debt obligations.

On that basis, I consider three metrics when analysing a company’s dividend prospects:

• Interest cover: a measure of how many times a company can cover interest costs from operating profit. While some analysts prefer to look at the overall debt level, this does not take into account the differences between sectors and their ability to sustain high levels of debt. For example, utility companies tend to carry more debt that tends to cost less, as investors are happy to lend against their stable cash flows.
• Operating profit margin: a measure of how much income is left after paying all operating costs. A large operating margin suggests a business has plenty of cash to reinvest in growth, meet its debt interest costs and return cash to investors.
• Free cash flow: the amount of free cash available after operating costs and capital spending. Free cash flow must be positive and cover a company’s total dividend cost.

This list is designed to give me a brief overview of a company’s financial position and dividend credentials. With that in mind, here are my top ten stocks with dividends based on the above criteria:

All of the above support dividend yields of 3% or more, generate lots of free cash and appear to have strong balance sheets.

They also cover a diverse range of sectors. That’s another important quality to keep in mind when adding dividend stocks to a portfolio – buying companies across a range of sectors can provide some protection against changes in the economic environment.

Britvic (second on the list above) is the perfect example of what I’m looking for in a top income stock. Last year the soft drinks group generated a free cash flow from operations of £176m, leaving plenty of room to fully fund its dividend, which cost £75m. Interest on the company’s debt of £18.5m was easily covered by £161m of operating profit and the group has earned an average operating margin of 10.5% for the past decade.

Interestingly, the company’s net gearing is relatively high at around 150%, which would be enough to exclude the stock from any screens that take overall debt levels into account. However, this ratio does not take into account the intangible assets, which are a vital component of the business for firms like Britvic. The value of its soft drinks brands is not reflected on the group’s balance sheet. Therefore, they won’t be reflected in any gearing ratio figures. Still, as my numbers show, Britvic’s debt is quite sustainable.

Moneysupermarket.com (sixth on the list above) suffers from the same issue. The company’s net gearing ratio sits at around 40%, but its biggest asset is its brand, the value of which is not reflected on the balance sheet. Interest costs of £3.2m a year are easily covered by operating profits of £73m.

Research shows that in the long-term stocks with dividends can outperform the rest of the market. The organisations with the most sustainable dividends tend to be those with the strongest cash flows, fattest profit margins and sustainable debts.

SEE ALSO:

Five dividend stocks to beat inflation

The ten highest dividend yields in the FTSE 100

The ten highest dividend yields in the FTSE 250

The ten highest dividend yields on Aim

The ten investment trusts with the highest dividend yields

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Transcript

Merryn Somerset Webb: Hello and welcome to the MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine, and we are recording on 15th June, 2022.

Those of you who are watching markets will know that yesterday was the day that the S&P 500 finally fell into a technical bear market, 20% off its peak, and if you’ve been holding technology shares, you will know that things are very significantly worse in that sector.

Now, with me today to talk through all this and hopefully tell us what we should do. Sorry Liz Ann, but that’s what you’re going to have to do, tell us what we should do. I have with me today, Liz Ann Sonders, who is the chief investment strategist at Charles Schwab.

And, actually, before we even start, I’m going to say all of you, as soon as you’ve finished listening to this, go and follow Liz Ann on Twitter because she’s absolutely fascinating and lots of the good stuff I retweet comes directly from her. So, that’s @LizAnnSonders on Twitter. Liz Ann, thank you so much for joining us today. Hugely appreciated.

Liz Ann Sonders: Thanks, Merryn, for having me. Appreciate the invitation. Looking forward to our conversation. You told me there were things to talk about it.

Merryn: I know. I was racking my brain this morning. I’ll tell you what. Let’s dive right in. Here we are, finally in a full bear market, one of the most anticipated bear markets of all time, certainly the most anticipated of my career. I think most people have their own idea of what’s driving it but let’s hear from you. What do you believe the story is? How did we get here?

Liz Ann: We got here because of the major shift and reversal in the liquidity backdrop. Unique to this particular cycle, during the worst part of the pandemic was, at least in the case of the United States, the double-barrelled nature of the stimulus, both on the monetary and the fiscal side and, of course, we know both of those are a thing of the past right now.

I think the timing of the bear market or the highs, the highs having been hit, in particular for indexes like the Nasdaq and the Russell 2000, which had their highs in November directly tied to the point at which the Fed announced the start of this move toward tightening financial conditions, tighter monetary policy. I think that was the initial trigger for the move down, a reflection of this changed liquidity environment.

I also think the market has priced in some economic slowdown but probably not yet a recession, and I think a recession is arguably significantly more likely than a soft landing. I think the next phase may have to be a rerating in terms of the profits outlook. I think the second quarter earnings season that will start in earnest in a few weeks may be an important inflection point, not just in terms of earnings but profit margins, and that could be the next phase of digestion for the market.

Merryn: I like the way you use digestion. Let’s go a back a bit, then. Would you say that the Fed is, to a large degree, culpable here in that loose monetary policy has been the great bubble creator and they were very late to realise that if you keep monetary policy that loose, if you print money and pour it into people’s pockets you’re almost certainly going to get inflation? They were very late to understand that. So, can we lay the inflation, hence the money tightening, and hence the market collapse, at their door?

Liz Ann: Maybe some of the blame, if you want to call it that, can be laid at the door, but the surge in liquidity, the cause in the jump of M2 money supply going to almost 30% was both because of what was done on the fiscal side and what was done on the monetary side.

That’s very different than what happened during the Global Financial Crisis, where most of the stimulus was of the monetary variety. Of course, even Jerome Powell, himself, concedes that they probably waited too long to address it. They probably rue the day they came up with the terminology of transitory and actually put it written statements. It’s turned out to be anything but.

But it’s a combination of the sheer amount of liquidity, but also that liquidity and stimulus coming at a time when the economy was, for the most part, locked down. So, really what has happened is that liquidity went into a funnel and the funnel was into the good side of the economy, which is where this inflation problem really took hold, and into asset markets, the equity market, commodities market, the housing market.

And now we’re in the experience of that dream. Yes, the Fed concedes continuing to add to the balance sheet as recently as March probably didn’t make a lot of sense. That said, we’ll debate that forever. It’s sort of a counterfactual. If the Fed had moved off the zero bound earlier would we be in much better shape right now, or were the forces driving inflation outside of what the Fed can or cannot control sufficient enough that we might have had some version of this problem?

Again, that’s going to be something we debate forever but it’s a counterfactual, so we’ll never truly know the answer to that. But here we are and the Fed is solely focused on doing what they can to bring the inflation problem down.

Of course, monetary policy is a blunt instrument and all it can really do is try to tackle the demand side of the problem. They can’t wave a wand and tackle the supply side of the problem. They can’t bring energy prices down. They can’t speed up semiconductor production. They can’t wave a wand and get labour supply to lift. So, that’s the rub for the Fed. All they can do is try to squeeze aggregate demand via the tightening of financial conditions.

Merryn: Some would say, some do say, that there’s really no point in interest rate rises because it’s not going to make any difference to any of the main drivers of inflation.

Liz Ann: Well, it does if it squeezes aggregate demand and, quite frankly, you are starting to see that. You’re seeing it in the weakness across a number of housing metrics. You see it as recently as this morning with the squeeze on consumers and a not only weaker than expected retail sales report but negative. You’ve got real income growth in negative territory. Wages are strong but in real terms they’re negative.

So, yes, interest rates going up do tighten financial conditions and it does slow the economy, which is what the Fed concedes is what they can try to control by squeezing demand. Now, the perfect scenario of squeezing demand, squeezing job openings but not jobs, that’s a really, really tough needle to thread, and that’s why I think the needle points more toward recession because I think it’s a very difficult task.

But it is part of the solution to the problem, is rates going up, financial conditions tightening, slowing the economy, and the slowing in demand finally starts to help bring the inflation problem down.

Merryn: And the Fed does have this dual mandate that our central bank doesn’t have here. So, if it pushes the economy into recession it might succeed on the inflation front conceivably, although we don’t know because it depends what happens to energy prices and so on. It might succeed on the inflation front but then it will definitely fail on the employment front.

Liz Ann: You’re right and I think the likelihood of success on the inflation front without hitting the labour market, I think the likelihood of that is maybe slim to none. The question is how much damage needs to occur in the labour market before inflation starts to come back down to whatever level, whether truly the goal is back to the 2% target or whether, at some point, they’ll express a comfort level with the landing point maybe being a little bit higher than that.

I heard a reference, I think it was the last FOMC meeting or maybe it was the first one when they raised rates, that laid out the scenario of tighter financial conditions, tighter monetary policy, more rate hikes coming, but the dot plot showed almost no impact to the labour market, and I heard somebody refer to it as the immaculate tightening. It’s probably not possible.

No one hopes for or wishes for a recession. I don’t think the Fed is trying to engineer a recession but Powell has been, I think, appropriately honest about the fact that it might be what is, not needed to bring inflation down, but the Fed would be accepting of that as a condition in order to bring inflation down.

Given that we already had a contraction in growth in the first quarter and we’re not seeing much of a lift at all, I think a recession is, again, more likely but perhaps that helps to solve the problem more expeditiously than if somehow we managed to skate above recession level with a continued strong labour market and a Fed that needs to stay aggressive for longer. So, as you think about different scenarios, I’m not sure the recession scenario is necessarily the worse scenario if it narrows the timeframe of getting inflation under control.

Merryn: Interesting. What are the risks of stagflation in the US? In the UK we always worry about stagflation because of our experience during the 1970s, in particular because we had a wage-price spiral, relatively strong labour unions, etc. And we look across to the US now and we can see a lot of movement in labour power and more unionisation, constant demand for higher wages.

Of course, it is time that returns were rebalanced towards labour. As you said, real wages are still falling but are you concerned that we will start to see real wages rise quite dramatically? Although, of course, maybe not a concern, that’s a positive, right, because real wages have been stagnant for too long.

Liz Ann: Right. Nominal wage growth has picked up to very strong levels. The rub, of course, is that inflation is still higher. Maybe my answer to your question about stagflation is too much about semantics, so maybe it doesn’t matter. However, if you want to think about the definition of stagflation borne out of the 1970s, at least in the United States, it wasn’t really just a broad slow growth or weak growth and high inflation. The growth piece of it was more directly tied to the labour market, to a high and deteriorating unemployment rate.

And that’s not really the environment that we’re in right now. I think that there are at least as many differences between the current environment and the 1970s as there are similarities. If you generically want to define stagflation as slowing growth and still high inflation then, yes, you use that terminology.

Again, maybe it’s just semantics and it doesn’t matter. I think the better, call it, textbook term for what we’re experiencing right is now is countercyclical inflation. A partner to that definition is cost-push inflation, where inflation prices gets so high it starts to put downward pressure on demand.

And that environment that I think we’re definitively in right now followed last year’s procyclical or demand-pull inflation where, courtesy of the stimulus and the economy being locked down and the funnel into goods, we saw this huge surge in inflation because of the demand side, and that was procyclical inflation because it came in conjunction with strong growth. And now that has morphed into this countercyclical inflation.

Yes, there’s a tension on an increase and an attempt for unionisation but we don’t think we’re going to see anywhere near the kind of traction that would get us to the 70s environment. You had a different productivity backdrop in the 70s, you had a different globalisation backdrop, you had a very different demographics backdrop. So, I’m not sure what we’re seeing is a repeat of that environment. It’s still uncomfortable and it’s not helping asset markets but, if we want to be pure, I think this is not 70s redux.

Merryn: What of the idea that we don’t have to worry about inflation all round because, as we always say, the greatest cure for high prices is high prices, in that that engenders a supply response, particularly in commodities markets and we should see a big supply response from OPEC, from Venezuela, from shale producers in the US and oil prices will be back down before we know it?

Liz Ann: Well, the problem is, in terms of the supply side on energy, you have the more added rubs in this current cycle of what has been the policy direction toward clean energy and the disincentives for increased production. So, yes, near-term the United States can do what we’ve already done, release SPR, try to get more energy into the mix from OPEC, OPEC+.

Those are not immediate solutions and, of course, exacerbated by the first ground war in Europe since the mid-1940s. So that, as more than just a needle mover, means a different scenario than if we were simply dealing with a supply-demand imbalance. That said, we are experiencing across, maybe not the full spectrum of commodities, but there are areas where high prices is a cure for high prices. Copper has come down. Lumber has come down.

And I think, maybe not in the aggregate, but we’ll start to look at individual situations where either high prices ended up being the cure by virtue of a supply response or a hit to demand and/or just the effect of the economy continuing to slow as a driver of demand destruction. I think the oil outlook is less easy, not that any of this is easy, to try and gauge, again because of the unique additive of the Russia-Ukraine War.

Merryn: Now, everything we’ve talked about so far points us in the direction of lower profit margins, profit warnings and valuations looking higher than you’d think they would, given how much the market has fallen.

Liz Ann: We did see the P/E ratio in this most recent cycle get to the high 20s. That was at the end of 2020, beginning of 2021, caused that spike to, on a forward P/E basis, a level pretty much right in line with the peak that we saw back in the 1999 period of time and that, of course, elicited a lot of concerns. Is this bubble 2.0, tech bubble 2.0?

The difference, of course, is that what caused what ended up being a very short-term spike up to the high 20s in the current environment was the pandemic collapse in the E, courtesy of not only the parabolic rebound in earnings that we saw off the pandemic low, plus more recently the bear market in stocks. We’re now down into the 17-18 range, depending on what earnings estimates you use.

That may seem a bit more reasonable. The problem, of course, is that we’re in a high inflation, rising interest rate environment, so the discount rate that we need to use to discount future earnings and cash flows has now gone up, making those cash flows and future earnings less valuable.

And I’m not sure that move down to even the teens yet either reflects where we should be, given where interest rates are and inflation is but, also, I think we’re on the cusp, to the point at the beginning of your question. I think we’re at the point where, for seven quarters now, we have had analysts set the bar too low. Now, I think the bar may be set too high.

Merryn: So, there’s going to be disappointments.

Liz Ann: Yes. We’re certainly hearing it from certain companies in certain segments of the economy. I think we absolutely have seen a popping of the stay-at-home bubble, if you want to call it that and consumer-oriented major retailers, Target, Walmart, Amazon, have been very aggressively talking about we now have too much inventory, we overbuilt, we probably overhired, and at least hinting that discounting may be in the cards.

That obviously could be a hit to profit margins and also, though, could mean that not across the board, certainly not at the headline level of inflation metrics like CPI, given the weight of energy in there, but I think may be a surprise, is how quickly we shift from supply limits and disruptions to supply gluts in certain segments of the economy.

That certainly garnered the market’s attention, when Target came out and said we basically have too much inventory and I think that too much inventory story went from one-off anecdotal companies early in this phase of the cycle where you had Peloton saying too many bikes and Lululemon. But, then, when it broadens out to the Amazons and Walmarts and Targets of the world, it’s no longer one-off, it's no longer anecdotal.

That could finally be one of the downward pressures on inflation, maybe not imminently but I think it’s coming. It’s just a question of the offsets. The stickier services components of inflation are now moving up, the shelter components. What’s the offset mechanism? That’s something to be determined.

Merryn: Here’s the impossible question. How much further do you think the market has to fall?

Liz Ann: I’ll give you the honest answer. I don’t know.

Merryn: I don’t want an honest answer. I want to you make something up.

Liz Ann: We can. We can go by history, but even history has a lot of variability around ranges. But here’s some history and it is bolded, exclamation pointed, for what it’s worth, preamble to this. We’re already in a bear market. So, we know that. By the way, my answer to your question, if you were asking it in early January and we were at all-time highs and you said, okay, what are the scenarios for the market if we go into recession this year versus not, it would be a different answer. Now, we’re down 22% in the S&P, 30% for the other indexes. The average member drawdown, even for the S&P is 30%, it’s 50%. So, there’s a lot of pain already.

If you look at the history of the S&P 500 and if you look at bear markets, and I’m going to be a little loose with the definition, only because we’ve had four or five bear markets that didn’t exactly get to down 20%. You got to 19 and change. But because there’s so many of those, put that into the mix. So, bear markets defined as 19% or worse, with recession or without recession, in some reasonably similar period of time. Of course, they never correspond precisely, but a bear market that had a recession association with it, a bear market that hasn’t.

The bear markets with recessions have been, on average, a decline of about 34%, without recessions 28%. That’s not a huge difference. The bigger difference is duration, is the length of bear markets when there has been an accompanying recession at some point, some reasonably similar period of time, have lasted twice as long. So, at this stage, I think it’s probably more about how much longer this goes on than how much deeper it goes.

I don’t think that this at all resembles 2007. There are, call it, bubbles that are popping, certainly spec bubbles in segments of the market that just had no justification for the extremes in performance, obviously areas like the domain stocks, and crypto, and SPACs, and non-profitable tech, the narrative-driven thematic areas. Those bubbles have popped in spectacular fashion. There’s no question about that.

But how much worse it gets for the overall market? I don’t think this is 07. Even as these speculative bubbles burst, it’s not like when the housing bubble burst in 2006 into 2007 because there was so much leverage tied to absurdly ridiculous lending practices and trillions of dollars of derivatives tied to the mortgage market that infiltrated a highly-leveraged global financial system, such that it was literally and figuratively a house of cards.

I think we can see some of these bubbles pop, even see housing rollover, and it’s unlikely to take the entire financial system down with it. I think this is a more classic end of a cycle where growth overheats, inflation overheats, the Fed has to get aggressive, they tighten into a recession, and there you go. So, I don’t view this as one of these epic declines.

What I do worry about is hidden leverage out there in the system, some of which gets discussed more recently with the crypto implosion. Is there hidden leverage there, that we have yet to see some of the whales come to the surface? And because that’s not a very transparent market, I’m not sure about that. All I know, and I’m a crypto sceptic and I have been forever, is that associated with leverage in the crypto world the obligations associated with any kind of leverage, including leverage that might have been used to purchase crypto, the obligations associated with that leverage need to be paid in fiat dollars.

So, there’s the margin call issue that has bled into traditional markets and whether there is, call it, a long-term capital management thing out there, that’s always the unknown because bear markets are like you throw a stick of dynamite in the water and the minnows come up first and it’s not until the ripple effects where you see the whales come up. So, not quite a black swan-type thing but if the liquidity tide goes out and whoever said it, Warren Buffett, you see who is swimming naked. And I’m not sure we have fully flushed that out yet.

Merryn: And it’s most likely to be in crypto, isn’t it, because that’s the area we can see the least of below the surface?

Liz Ann: It seems so, either directly related or indirectly related, but you could also see more of what happened last year associated with meme stocks, with the problems at Archegos and Melvin Capital. So, there could be more of those types of stories too, that weren’t tied specifically to crypto but they were tied to speculation.

Merryn: So, where do we hide? Where do MoneyWeek readers go now to keep themselves safe from the ongoing carnage? Some people would say crypto, but clearly you’re not going to say that and I wouldn’t have said that either.

Liz Ann: I am not going to say that. Well, I’m not sure it fits the bill if you’re looking for a store of value, down almost 70%. I will say about crypto is when I interact with people who are experts in the space, and I’m certainly not, or real believers, I ask one question always upfront. And, I’ll be honest, I get a lot of different answers, none of which have ever been compelling enough to me, personally, with what little I know, to say all right, now I see, now I get the use case, the story.

And the question is what problem is it solving for? And I’ve gotten the store of value. I’ve gotten the don’t like the structure of fiat currencies. Don’t trust them, the systems behind it. Maybe not ironic that the dollar has been on an absolute tear when crypto has gotten just whacked. You certainly hear, a hedge against inflation. Kind of odd, then, that you’ve had a 70% drawdown in Bitcoin at the same time you’ve got inflation on a tear.

The problem with where to hide is if the goal is just safety in nominal terms, I just don’t want to lose any money, then cash, of course. But the problem is cash is a sort of losing investment, if you want to call it that, in real terms because inflation is higher than cash yields. Then, of course, you’ve had the double-down market, both on the equities side and the fixed income side.

If you had been 100% of your portfolio in energy stocks in the last year or so you would have fared very well relative to the carnage that we have seen, but I certainly would never recommend that anyone put all their eggs in one basket and play that kind of timing game.

So, really, the way to navigate through an environment like this is, number one, if you literally say I do not want to, in nominal terms, lose any money, then you only have one choice, is not to be invested. The rub, of course, is then what happens when things start to recover, now you’re sitting in cash. So, there’s the dual timing decision of the get out, get in. And I always say neither get out or get in is an investing strategy. That’s gambling on two moments in time and I don’t know any successful investor that became successful by that all or nothing gambling.

So, it’s boring to talk about but ultimately you’ve got to go back to the disciplines of make sure you’re diversified across and within asset classes. This is not a time to take too much risk. Avoid the next hot thing, which now it’s obvious that we should have avoided things like meme stocks.

Rebalancing is a beautiful strategy. It’s a way to take advantage of volatility and trim into strength and add into weakness and stay in gear by taking advantage of the big swings, but it doesn’t mean you are going to eliminate the downside. It keeps you disciplined and it keeps you, call it, in the game. And the lack of rebalancing, I put this in a report that I just published on Monday. It was yet again another update to a report I first wrote in 2008 called Panic is Not a Strategy.

And, sadly, I’ve had to update it a few times, including this past Monday, but I added into it. It is a really simple rebalancing analysis. If you do a really basic 60/40 portfolio, 60% stocks, 40% bonds, and most investors have a more sophisticated asset allocation than that, but just for math’s sake, let’s do 60/40.

If you were 60/40 in 07 and you did no rebalancing, by the beginning of 09 that had flipped. You were now 40/60. So, now, with the market about to launch into an epic 12-year bull market, you were 40% equities instead of 60%. So, there’s one example.

Let’s now say it’s 2009 and you’re at 60/40 or you rebalance to 60/40, but then you didn’t do any rebalancing subsequently. By the time you got to the beginning of this year you were 90% equities. So, it forces investors to do what we know we’re supposed to, which is buy low, sell high. That’s the only way to try to take advantage of an environment like this if you didn’t have the foresight to anticipate it and make an extreme move of moving everything into energy stocks.

Merryn: Oh, don’t we all wish we’d done that. Liz Ann, one final question. Gold. A lot of MoneyWeek readers love gold and hold a reasonable amount of it in their portfolios and they have been protected to a degree by their gold holdings during the last six months or so. Would you be a holder of gold?

Liz Ann: We generally, for investors that would like that, call that concept, to some degree, a bit of an inflation hedge. It’s got a sporadic, not a perfect track record, as being an inflation hedge but it’s got at least as good a track record of also being a hedge against global instability of any variety, sometimes geopolitical, sometimes military.

So, we generally say for investors that want that type of protection, that having a small position in gold probably does make sense. Sometimes gold can see sentiment swings, much like sentiment at extremes can be a contrarian indicator for equities. The same for other asset classes like precious metals. The only potential good news is I think a lot of attention, and maybe interest and buying in gold that probably would have otherwise occurred in the past year or so with this inflation backdrop, got funnelled instead into crypto.

So, the good news is, even where we are now, we don’t have that questionable sentiment backdrop where everybody is on the bull side of the gold case, where in the past that sometimes has been enough to cause a move down, even if the fundamentals didn’t change to suggest that. As you already probably can tell, if somebody said, you’ve got two choices, crypto or gold for, whatever, 2% of your portfolio, I think you now know what I would have and would choose.

Merryn: I think we’re as one on that one, Liz Ann. Can I just say thank you so much for joining us. You’ve been absolutely wonderful and so interesting and incredibly helpful, and I think MoneyWeek readers will appreciate it enormously. And I know that anyone who listens to this will go straight off to follow you on Twitter.

Liz Ann: Thank you.

Merryn: Thank you very much for joining us.

Liz Ann: Thanks, Merryn.

Merryn: MoneyWeek readers, you know if you want to hear from us, you know where to go, MoneyWeek.com, where you can also sign up for our daily newsletter, Money Morning, and follow us on Twitter @MoneyWeek or @MerrynSW for me, @John_Stepek for John. And please do leave us a review on your podcast provider of choice. It is only by leaving us reviews that we get our listening numbers up and we can manage to get fantastic guests like Liz Ann Sonders on. So, please go and do that. Liz Ann, thank you so much. I hope we will talk to you again.

Liz Ann: Thanks, Merryn. Really appreciate it.

“The bigger the party, the worse the hangover,” says Russ Mould of AJ Bell. America’s S&P 500 plunged on Monday to close down more than 20% since its 3 January high, meaning that the benchmark index is officially in a bear market. That marks the end to the bull market that began in March 2020. While it was “the shortest bull run on record since 1950… what it lacked in duration it made up in intensity”.

The sell-off followed data last week showing that US consumer price inflation hit an annual rate of 8.6% in May, the highest level since 1981, dashing hopes that it had peaked. The unexpectedly high figure increases the odds of sharp interest rate rises. Traders are now betting that the US rates will be at 3.6% by the end of 2022, up from expectations of 2.9% last week.

Tech stocks have been hit especially hard, with the tech-heavy Nasdaq down 28% since the start of the year. Yet the bear market is broadening to include sectors that had been safe havens so far this year, says The Wall Street Journal. The S&P 500’s energy segment plunged 5.6% on Monday, “a deeper decline than that of the broad index”. On the same day, ten-year US treasury bonds registered their worst one-day performance since March 2020, as yields hit their highest level since 2011.

Structural inflation

The US inflation data was “awful” and got “worse the more you looked”, says John Authers on Bloomberg. Energy prices soared 34.6%, their biggest annual increase since 2005, while food costs were up 10.1%. Policymakers might be able to do little to control soaring commodity prices, but rising rents and house prices have also sent US shelter inflation to its highest level in three decades. “Plainly, tighter monetary policy should help rein in an overheating housing market”.

For central bankers, “easing the inflationary economy onto the runway safely and comfortably is all that matters” now, says Tom Stevenson in The Daily Telegraph. Such a “soft landing” would require “just enough demand destruction and a resumption of sufficient supplies of key inputs like energy” to tame inflation. In a “hard landing”, by contrast, “central banks go too hard, too fast and push the economy into recession, either by accident or deliberately”. A “third possibility is a continuation of the current stagflation environment in which central banks remain behind the curve”, a scenario that would amount to “a re-run of the ugly 1970s economic backdrop”.

There are good reasons to fear that high inflation is here to stay, say Marco Pirondini and Alec Murray of Amundi Asset Management. There are structural labour shortages in the US and China, not to mention the inflationary impulse from higher global spending on defence and energy security. In such an environment investors will begin to “reward companies based on their current fundamentals rather than on earnings potential in the distant future”. In the first four and a half months of this year, the least expensive quintile of S&P 500 stocks returned 6%, while the most expensive fell 23% as investors “shift from paying any price to paying the right price”.

SEE ALSO:

What to buy as the tech-stock bull market crashes

Protecting your wealth from inflation won’t be easy – here’s what to do

We’re in a bear market – change the way you invest

Tech stocks have had a rough start to the year. The tech-heavy S&P 500 is down 13.5% since January and the Nasdaq Composite is down 23%. In the UK there have been some notable outliers, chief among them two London-listed digital infrastructure funds: Cordiant (LSE: CORD) and Digital 9 (LSE: DGI9). In the year to date, Cordiant’s share price on the London market is down just 5.3% (up 4.8% over the last year), while Digital 9’s share price is actually up around 1%. These two funds’ closest peers, established US players American Tower and Crown Castle, have both suffered much bigger losses so far this year, down 12% and 9% respectively.

Both UK funds have delivered positive results. Cordiant announced a net asset value (NAV) of 106.34p per share (compared to 101.6p per share on 30 September 2021), equating to NAV and shareholder total returns over the period of 10% and 10.3% respectively, ahead of its target return of 9% per year. Digital 9’s numbers have also been impressive.

But dig around, as many fund analysts have done, and you find a more interesting observation. These two UK funds have been canny buyers of private-market digital-infrastructural assets at good prices. For example, Cordiant acquired CRA, an operator of national digital networks in the Czech Republic which runs mobile phone towers, data centres and fibre optic networks, plus a national wireless network working alongside utilities. Digital 9 acquired a seed portfolio of undersea fibre optic cables that were upvalued in the listed portfolio shortly after listing.

Fund analysts at Liberum reckon that digital infrastructure is the fastest growing sector within infrastructure, with a forecast annual capital expenditure requirement of $600bn to 2035, surpassed only by roads and power. The volume of data created globally is forecast to increase by 23% annually to 181 zettabytes (close to 3.6 times the pre-pandemic level). Unsurprisingly, money is flooding into the sector.

A more daring option

Investing in mobile phone towers, data centres and fibre optic networks could provide steady cash flows. The assets have long lives, inflation-linked revenue streams and (especially in the case of Digital 9) first-tier global tech customers. Earnings before interest, tax, depreciation and amortisation (Ebitda) margins are typically in the 45% to 60% range and contracts are usually long term.

I’m currently invested in both Digital 9 and Cordiant but if the digital infrastructure theme really interests you, I’d suggest looking at a more adventurous option which has by contrast had a terrible start to the year. Helios Towers (LSE: HTWS) is a £1bn UK-listed operator of mobile-phone towers and base stations, mostly in Africa. Its shares are down by 30% in the year to date. Digital 9 and Cordiant have stuck to fairly boring Western assets, but Helios has focused on growth markets in Africa where mobile phone usage is shooting up. It has over 14,000 sites dotted throughout the continent and key customers include well known businesses such as Airtel and Vodafone.

Helios is heavily investing to build a trans-continental network of towers that it lets to mobile-phone firms, with $373m in capital expenditure last year. It could be a very profitable business: in 2021 it produced revenues of $449m, Ebitda of $241m and free cash flow of $168m. Analysts expect revenues of $690m by 2023 and Ebitda of $367m, though capital expenditure is still heavy.

Investors may also be wary of its heavy debt. Despite sitting on $529m in cash , it has gross debt of $1.4bn. If we are entering a global recession, that could scare off investors worried about increasing interest payments just as revenues could decrease. But if Helios can navigate these challenges its network of towers could be hugely valuable as African growth rates pick up again.

“Here we go again,” says Russ Mould of AJ Bell. “The bear market that is threatening to chew up a lot of the past few years’ gains… looks like so many other downturns that have gone before it.” Bull markets usually “crack at the periphery first and trouble then filters through to core assets”. The plunge in cryptocurrencies was “one early sign of trouble”. Enthusiasm for Spacs has also cooled. Now the wider market is feeling the heat.

Last Friday, Wall Street’s S&P 500 share index briefly entered bear-market territory after falling 20% from the record high it hit at the start of 2022. The index has fallen for seven weeks in a row, its worst such streak since the dotcom bubble imploded in 2001. The Dow Jones Industrial Average has fallen for eight straight weeks, its worst showing since 1932. The tech-heavy Nasdaq index has been in a bear market since March.

Trouble spreads

The sell-off has been led by tech stocks. Eight firms collectively account for 46% of the S&P 500’s losses this year, says Karen Langley in The Wall Street Journal – little surprise given how much the tech giants had come to dominate the S&P. On an equal-weighted basis (which strips out the higher weighting given to big firms) the index has fallen by 13% this year, rather than 18%.

Yet the pain is spreading. The latest sell-off was triggered by poor results from US discount chain Target, heightening fears that retail earnings will slide due to supply-chain problems and inflation. “Other than energy and commodities, there have been few haven sectors,” says Ethan Wu in the Financial Times. That has driven cash hoarding among fund managers to a 20-year high, according to the latest Bank of America global fund manager survey.

Some will be tempted to hunt for bargains, but the point of “capitulation” – when investors lose all hope – has not yet arrived. “Margin debt remains above pre-pandemic levels and call option volume is only back to late 2020 levels.” Bank of America’s wealth management unit reports that clients are “cutting equity exposure from very high to merely high”. For now, these “stubborn remnants of optimism” have prevented an even bigger share-price collapse.

Value investing shines

If history is any guide then this sell-off should have further to go, says Evie Liu in Barron’s. “Of the 12 bear markets since World War II, nine lost at least 25%.” So be wary of “relief rallies”, where markets recover for “about two months before things turn ugly again”. Note too that US stocks are still expensive. “Even after the 20% drop, the S&P 500 is still trading around 18 times earnings.” In past bear markets, “the index didn’t hit the bottom until it reached 12 times”, implying another 30% drop from here.

The outlook for cheaper markets beyond the US is more encouraging, says Chris Watling of Longview Economics, who cites “low tech weightings, the ongoing ‘loose’ monetary conditions and continuing economic growth” in places such as Europe. Notably, the FTSE 100 is flat so far this year, a significantly better performance than that seen on Wall Street.

How are the mighty fallen – the Nasdaq has had its worst week since March 2020 and is down by 28% this year.

Scottish Mortgage is down 41% in the year to date – and is no longer the largest investment trust in the UK – while the Ark Innovation ETF in the US is down 59% in 2022.

Both investments massively outperformed any index you care to choose over the past five years; both have now given up the majority of that outperformance. Just like that.

Look at a few individual stocks and you can see the pain: Netflix is down 70% from its highs, Amazon 40% and Tesla 40%. This, Scottish Mortgage manager Tom Slater told a conference this week, has been the worst start to a year for growth stocks in 90 years.

On the face of it he is absolutely right; look at the way different investment styles have performed so far this year and you can see that growth is very much out of favour. Numbers from Waverton Asset Management show that if you divide the MSCI AC World Index up by style it is what the analysts call “high growth” that is really taking the hit this year so far – down 23.1%. Next up (or down, should I say) is “growth” – down 10.9%.

Look at it by sector and you will see something similar – those that have given us the most growth in value are the ones now suffering the most. This year, consumer discretionary stocks inside the S&P 500 are down 30% – pity the holders of Peloton, down 85% in the past 12 months.

Communication services are down 26% this year and information technology is down 21%.

But compelling as the growth-is-out-of-favour argument sounds, it is not the whole story. We might instead say that this has been the worst start to a year for very expensive stocks in 90 years.

Value stocks are outperforming growth stocks

Look again at the investment style split and you will see that the outperformance comes from value stocks. Waverton says stocks it categorises as “deep value” are up 5.6% on the year, while value stocks are up 2.1%.

Look at the sector breakdown and the stuff that has gone up is not necessarily stuff that is the opposite of growth – it is just stuff that wasn’t expensive before. So energy is up 38% and consumer staples are more or less flat.

Andrew Lapthorne of Société Générale sees it like this too. Disentangle the data, he says, and you can see that it is the most expensive quintile of stocks that is moving most: down 30% from its highs in the US and 20% in Europe.

Compare and contrast as well, the overall performance of the S&P 500 and the FTSE 100: the latter ended last year looking expensive in terms of price/earnings (p/e) ratio; the former ended it fairly reasonably cheap.

But it is the US index which is down 18% so far this year, and the London one which is down by only 3%. The truth is that while it is growth stocks that are falling fastest, they are probably not falling purely because they are growth stocks but because they are – in some cases we can now say were – expensive stocks.

It is not entirely straightforward, of course. Growth stocks have been expensive largely because, with interest rates so low, markets have been prepared to pay for the expectation of high future earnings (jam tomorrow).

This is just maths – and when interest rates rise, or are expected to rise, the dynamic reverses. Investors are prepared to pay less for promises of jam tomorrow, however innovative and exciting it might be, and more for jam now.

Today, inflation is both far too high and far too sticky for comfort – the US consumer price index came in just above expectations at 8.3% this week. And rates are obviously expected to rise.

So the fall in share prices of the big names is not really a comment on the likely success of their businesses. There is some concern about earnings growth falling into a recession, of course – which makes being absolute about anything hard.

But, in general, few people have sold Moderna because they think a rise in interest rates makes its vaccines business less good, or Tesla because they no longer believe in computers on wheels, or Ocado because they no longer think warehouse automation is kind of cool. They have been selling because in a world of slightly tight monetary policy, January’s share prices were wrong; investors have not turned against growth so much as the price of growth. That’s it.

You can blame any losses you might have on inflation, on war, on Chinese lockdowns, or on the US Federal Reserve, or whatever, but you will also know that had we entered this nasty environment with cheap markets they would have been much less likely to spark a bear market.

“Growth” may soon be cheap, too

So will prices go back up to their previous levels? Sure they will, if the underlying companies eventually show the market the money. What they may not achieve is the heroic p/e levels they hit last year.

Earnings now matter. If you want a historical comparison for this, look at January 1969 to June 1970. Share prices had doubled in the previous two years. That made them expensive – the UK All Share Index was on a historic p/e of 23 times against 13 times when the bull market began.

Then, labour relations began to turn nasty, interest rates shot up, with the benchmark yield going from 6% to over 9%, and the UK chancellor decided to do a bit of fiscal showing off by putting up both employment and corporate taxes. Does this sound familiar? The London stockmarket fell 36.6%. Depressing stuff.

There is a glimmer of hope. The past few weeks have done wonders for valuations. William Dinning of Waverton has done the numbers. This week he had global equity markets on an average forward p/e of 15.2 times (it could be lower by the time you read this!).

That is the lowest level since the bear market of early 2020 (when it was 14.1 times). On Dinning’s numbers the US is still at the upper end of its historic, 20-year, p/e range. But take that out and the rest of the world is below its historic average. A few markets – the UK stands out on a forward p/e of 10.4 times – are trading at “meaningful discounts” to historic averages.

That doesn’t mean the bear market is over. A recession, very possible at this point, would hit earnings and so crash the “e” in p/e. But it does suggest that if you are looking for long-term value, some is beginning to emerge. Not long now and you may even be able to buy cheap growth.

• This article was first published in the Financial Time

Yesterday the Federal Reserve – the US central bank – raised US interest rates by a whopping half a percentage point.

Markets promptly leapt higher, seemingly overjoyed at the biggest rate hike seen in more than two decades.

A year ago, this is not a pair of sentences that you’d have expected to see co-existing in the wild, without one of them being false.

Yet these are the strange times we live in – better get used to them.

Markets are relieved that the Fed didn’t raise rates by even more

The Federal Reserve raised the federal funds rate (the US equivalent of the Bank of England rate) to “between 0.75% and 1%”. That was a half-percentage point increase.

It also confirmed that it is swapping quantitative easing (QE) for quantitative tightening (QT). The Fed won’t be actively selling bonds (not yet, at least). Instead it will allow bonds it already owns to mature without reinvesting the proceeds.

The S&P 500 – the main US index – rose by more than 3% (which was very much a direct result of the Fed’s move and the subsequent press conference).

Why the cheery reaction to something that would as recently as a year ago probably precipitated an epic slide?

Put simply, it just wasn’t as bad as it could have been. Markets are all about expectations – the whole purpose of markets is to price risk efficiently.

On that front, investors were already expecting a half-point rise, so that was already in the price.

But what was also in the price, as a “low odds but still frightening” scenario, was the idea that the Fed would raise rates by three-quarters of a percentage point, rather than just a half.

So this was a relief rally. The Fed has no intention of stopping raising rates, but the fear that it would go full-on inflation warrior with no regard to triggering a recession was also put to bed.

Instead, Fed boss Jerome Powell said there will be more half-point rises in the meetings to come, and that while it would be a tricky task, he was hopeful of a “soft-ish” landing.

Long story short, rates are still rising, and the Fed has not yet been sufficiently rattled by market tantrums to change its tone. But the worst-case scenario (from a market point of view) was taken off the table.

That’s what triggered the stockmarket rally, not to mention a dip in the dollar and even a bit of a rebound in gold.

Why should you care as a UK investor?

To get a little more specific: why does all of this matter for a UK investor (assuming that’s what you are)? After all, isn’t today’s Bank of England rate decision more important?

Well, yes and no. The Bank of England move has more of an effect on your mortgage, certainly, especially if you have a standard variable rate (which you shouldn’t have – see here for more on mortgage rates and why now might be a sensible time to fix).

But in terms of global stockmarkets – which is where at least a chunk, quite possibly a very big chunk, of your pension money is sitting – the Fed is the one central bank to rule them all, as Tolkein probably wouldn’t have put it.

Why does the Fed matter so much? Primarily because the Fed is the custodian of the US dollar. And the US dollar is the most important currency in the world.

And right now, as my colleague Dominic wrote yesterday, the US dollar is at a critical juncture in terms of its strength relative to other global currencies.

Here’s the issue: everyone needs US dollars, and when US dollars get more expensive, dollars are harder to come by. In other words, when the US dollar is getting stronger, monetary policy for the world is getting tighter.

When monetary conditions tighten, “risk-on” assets (that is, the sorts of assets people buy when they feel comfortable taking risk) tend to go down. “Risk-off” assets, by contrast, go up.

Sterling – believe it or not – is a “risk-on” asset. Again, simplifying somewhat, this is because it is backed by a highly-financialised economy rather than one built on commodity exports or a healthy national balance sheet.

A weak pound adds to the inflationary pressures we’ve been feeling. But a stronger currency usually implies pushing interest rates higher, and if your economy is not in a fit state to cope, that makes for a very tricky balancing act.

So, all else being equal, a slightly more relaxed Fed takes some pressure off the Bank of England and other central banks to keep up in terms of rate increases.

As for the rest of your portfolio – well, as Dominic points out, if you’re an investor, you probably would prefer to see the US dollar weaken from here rather than rocket higher.

The question is: is this just a lull? The calm before the storm? And there, I have to say, the jury is out.

Markets had been pricing in much tighter monetary conditions; the scary scenario was arguably “overbought”. The US dollar had moved up too quickly, and bond prices had fallen too fast.

But while the market might need a breather, it’s not obvious that the overall direction has changed yet. Unless recession risk rises obviously, or inflation looks as though it’s peaking – either of which would offer the Fed an excuse for erring on the side of dovishness – there’s a definite risk that markets will find themselves panicking again before too long.

SEE ALSO:

If the US dollar keeps rising from here, it’s going to hurt

Despite rising commodity prices and higher inflation, equity markets have recovered well from their March lows.

As analyst Ed Yardeni pointed out on Monday: “The S&P 500 dropped 13% from its record high on January 3rd through March 8th. It rebounded 11% through March 29th. Since then, it has lost 3% through Friday’s close” leaving it down 6.5% for the year to date – or just 2.5% in sterling.

The FTSE 100 meanwhile, is up 2.2%.

Can this perhaps surprising resilience continue?

Can the Federal Reserve avoid pushing the US economy into recession?

“The forward earnings of the S&P 500 remains on a sharp uptrend,” notes Ed Yardeni, “but the forward price/earnings ratio of the S&P 500, having dropped to 18.1 on March 14th, remains relatively high at 19.3, down from an early November 2021 high of 21.5.”

The rest of the world is significantly cheaper on a forward multiple of 13.4, as are the US mid- and small-cap sectors, while the S&P 500 valuation is pushed around two points higher by its top eight tech-related mega-caps.

Yardeni notes that profit margins remain near their record highs but still expects the earnings of the S&P 500 to rise to $240 per share this year (up 15%) and $260 next (up 8%) compared with an analysts’ consensus – on which forward multiples are based – of $227 this year and $240 next. If he is right, the forward multiple will fall to 17 by the end of the year.

On this basis, US equities would be attractive – but he still advises “don’t fight the Fed when the Fed is fighting inflation.”

The determination of the Federal Reserve, America’s central bank, to raise interest rates to combat inflation is becoming increasingly apparent. This points to a federal funds rate of 2.75% to 3% by mid-2023, according to Yardeni, with inflation moderating to 4-5% in the second half of 2022.

The question is, he says, “can the Fed bring down inflation without a recession?” If not, then earnings forecasts will be cut and the valuation multiple will be correspondingly higher. Earnings growth is needed to bring the multiple of the S&P 500 down to attractive levels.

US mid- and small-caps and non-US equities look much more attractive, but are unlikely to perform well unless led by the S&P 500. The resilience of capitalism in the US, its relative political stability and its self-sufficiency in energy argue for a premium valuation, as does its global leadership in innovation. As the saying goes “when America sneezes, the rest of the world catches a cold.”

The prospect of rising interest rates has led to rising government bond yields, with the yield on the ten-year US Treasury recently reaching 2.7%. A rise to anywhere near the inflation rate, currently 8.5%, would be disastrous for the US economy and stockmarket but current yields are so low that they imply significant losses in real terms for bond investors.

Greg Openshein of Verdad Capital is more relaxed, however. “The drawdown of 16% in the ten-year US Treasury that began in July 2020 is now the fifth-worst on record. The average six-month subsequent return from the worst drawdown is 4.9%.” The Fed is now in a cycle of interest-rate rises, he says, and these are normally positive for bond returns.

Don’t worry, be patient

To those who remember the 1970s and 1980s, it is remarkable that after-inflation yields on government bonds are so negative – but it would be wrong to assume that they are irrational.

The experts like to think that they are smarter than markets, but markets are nearly always right. Current yields imply that inflation will moderate rapidly, probably as the increase in commodity prices reverses. If so, the outlook for both bond and equity investors will improve rapidly.

Those who feel lucky might prefer to wait six months before investing, by when some of the uncertainties should have cleared, or wait for renewed market weakness. Both strategies risk missing the boat – and it is always hard to scramble into a rising market. Buying now and not expecting much until later in the year is a safer strategy.

Remarkable value is appearing in some unexpected places. As Sven Borho, co-manager of the £2bn Worldwide Healthcare Trust (LSE: WWH), says “we have seen the biggest bear market in 30 years in the biotechnology sector.” In the last 12 months or so, the S&P biotechnology index under-performed the S&P 500 by 64%, falling by nearly 50% to the level last seen in mid-2015.

“The healthcare sector now trades on a 20% discount to the S&P 500, the same as in the financial crisis. Every single time it has traded at such a discount has been the very best time to be invested, especially in innovation and growth.” This was not the consequence of the pandemic that we all expected.

The technology sector has suffered a sharp fall too, but David Toms, director of research at Hg Capital, puts this fall into context. The value of unprofitable companies relative to sales, he says, has halved in the last year – but that of profitable companies is only down 4%. “Unprofitable companies were growing sales much faster but growth for growth’s sake has been hit hard.” In other words, a year ago, unprofitable companies were valued at very similar levels to profitable ones but now they have reverted to their historic discount.

The software sector, he adds, now trades on 18 times cash flow compared with 14 for non-software, yet the valuation relative to free cash flow is very similar at 28 and 27. This reflects the low capital requirements of the software sector. With double-digit growth in revenue likely to continue, valuations are attractive.

In short, the valuations of many growth stocks are now either attractive or very attractive, having been pulled down by those that have failed to live up to early promise. The vulnerability of these stocks to the economic cycle and rising interest rates is low while long-term growth looks assured. Some of the world’s smartest investors are responding to the opportunity by buying those that have fallen out of favour.

Patience will be rewarded.

On 24 October 2020, Alibaba founder Jack Ma gave a now-infamous speech, criticising Chinese regulators for stifling innovation and calling for reforms. Since then, the Chinese internet sector is down by 60% – and by 72% from its subsequent peak high in February 2021. The extent of the collapse is in line with the slump in the Nasdaq in 2000 as the first internet bubble burst. In that case, the Nasdaq didn’t bottom until late 2002, but the subsequent returns have been dramatic. The best stocks are up by eye-watering amounts. Amazon has risen 55,000% since March 2001. Could there be similar opportunities today in the Chinese tech sector?

On the flip side, the best-performing large equity market in the world since the pandemic lows in March 2020 is not the S&P 500 or the Nasdaq, but India’s Sensex. This may come as a surprise: India did not have the resources to follow a Western or Chinese approach to the pandemic, and its economy has historically been adversely affected by a high oil price (the government subsidises the retail gasoline price and thus faces significant fiscal restraint with high oil prices). Does the Sensex’s unexpected strength so far and the extreme dichotomy in performance between Chinese and Indian shares present an opportunity to switch?

China's missteps and changes of direction

Chinese weakness is not solely about tech stocks – the wider CSI 300 index is down 28% since February 2021. This has come about due to a mixture of missteps and structural change in policy from the government.

In the first quarter of 2020, the Chinese government had great success in controlling the spread of Covid-19 with its severe “zero-Covid” strategy. However, that was the peak of its performance. The government then adopted a nationalistic model for its vaccine strategy. Chinese vaccines have proved to be much less effective at combatting Covid. Vaccine hesitancy has also been very prevalent in China. This has left a poorly vaccinated populous who have not attained any natural immunity to Covid because of the initial success of zero-Covid. This stands in stark contrast to Vietnam, which also had a zero-Covid strategy but has fully vaccinated its population, mostly with the AstraZeneca vaccine, and was therefore able to change track months ago.

There have been hints that the Chinese government would get rid of its zero-Covid strategy, but Xi Jinping doubled down on it this week. As yet, there have not been significant imports of foreign vaccines or treatment. Thus another six months of rolling lockdowns would appear likely in China.

The failed pandemic strategy fed a weak macro picture in China in 2021. The previous year was fine, as the Chinese economy benefited from the sharp recovery in consumer spending in the West. However as the West opened up, China stayed closed. This led to falls in consumption. With the government providing limited support to the economy or consumers, growth slowed and is continuing to slow. GDP growth in China in the first half of 2022 is likely to be the slowest in the last 20 years. That said, the government has started loosening both fiscally and monetarily and with Xi ’s eye firmly on his coronation for another five years at the party congress later this year, we should expect the Chinese economy to recover into the second half of the year.

Against this backdrop, the government has chosen to redirect its policies. Xi has said that the government will no longer encourage free-wheeling capitalism but would encourage “common prosperity”. In the West, “levelling up” policies don’t create panic about a return to the high tax regimes of the 1970s, but when you have the Chinese Communist Party in charge, investors are prone to worry over a roll-back of capitalism.

This was compounded by the very public regulatory attacks on the high-flying internet sector. Much of the pain has been born by Jack Ma. Ant Financial, his key asset that was heading for an initial public offering (IPO) before he made his ill-fated speech, has seen radical forced changes to its business model. The broader regulation has been focused on attempting to limit the monopolistic power of platform businesses such as Alibaba and Tencent. That said, it remains difficult to implement these policies and the leading internet companies (bar Ant) have seen little actual effect on their economics from new regulation. What has happened is that the government’s action has had a massive impact on investor sentiment on these companies – and thus their equities have seen a marked decline in valuations.

Chinese stocks are deeply out of favour

This has been exacerbated by earnings weakness. The Chinese internet sector is much more competitive than its Western equivalent – there are many more players in each segment of the market and new companies are arriving all the time. For example, Pinduoduo, the leading group-buying website (it offers significant discounts on a wide range of products if sufficient users commit to buy), has taken significant market share from Alibaba in the last three years, whereas in the West no one is significantly challenging Amazon’s dominance. Thus Alibaba is now going through an aggressive investment cycle to head off competition across a number of its business areas. Coming on top of the weak macro picture in China, this has led Alibaba to have weak earnings in 2021 and into 2022.

Those earnings are set to improve in the second half of 2022. Research from JPMorgan shows that the performance of Chinese tech stocks has tracked short-term earnings expectations. These will turn and the shares will recover. That will be accelerated by the dramatic shift in valuations for these names. Alibaba was once a growth name but now trades on eight times forecast 2022 earnings for its core business. With 40% of its market cap in cash and a free cash-flow yield nearing 10%, this is a deep value stock – but one with earnings set to grow 20% per year for the next three years. The wall of worry around Chinese tech is tough to break down, but investors will in time fight through to take advantage of depressed valuations.

Will Alibaba and its peers return to their halcyon days? Probably not, since the government now has them in its headlights, but they should still trade a lot higher. JPMorgan recently classified the whole Chinese internet sector as “uninvestable”, which looks like one of the great contrary indicators of all time. However, this highlights a problem with investment in Chinese equities in the medium to long term. The US now understands that China is looking to take it on in the great superpower contest at some stage in the next ten to 20 years, and Washington has awoken to the need to hamper China’s charge. That said, policymakers have waited so long that the Chinese economy is now integral to the world and to the US. As a result, significantly harming China will harm America – and so it will have to fight the battle in very specific areas.

Capital markets is one of those areas and this may in time lead to a significant separation in finance and investment. There is already a “China discount” that Western investors apply to all Chinese investments, but that discount appears to be steadily getting larger. Thus the driver of Chinese equities in the medium term will have to be their own domestic investors. Currently most Chinese investors cannot buy Alibaba shares (which are not listed on the mainland), and so there are limited buyers to replace US ones. This will change with rule changes in Hong Kong, but the valuation of Chinese equities may well stay cheap for longer than anticipated while we await the rise of domestic investors.

Indian investors take charge

By comparison, foreign investors have been sellers of Indian equities for the past few months but the index has remained resolute because domestic Indian investors have taken the strain. A burgeoning “cult of equity” is taking hold in India, thanks to the accelerating pace at which Narendra Modi’s government is making necessary structural changes. These will drive a new boom phase of economic development to match that of the early 2000s.

India has always been plagued by the corruption endemic in its politics, which has seeped into the economy and hindered development through the accumulation of bad debts in the banking system and discouraged foreign direct investment. Modi is finally tackling bad debt in the public sector banks through the creation of a “bad bank” (an asset reconstruction company) to take over bad assets and to finally break the link between corrupt politicians and the banking sector. This should allow banks to play an active role in funding much-needed infrastructure and investment in the Indian economy. Corruption remains, but it may become less growth negative. Successful Asian economies have all had corruption, but what was permitted was corruption of a form that is pro-growth. Hopefully India is heading in that direction.

Secondly, and just as importantly, Modi is making India an attractive place for foreign and domestic investment through reform of Indian employment law – with a clear favouritism for domestic businesses. His “Made in India” initiative has been backed by large production-linked incentive (PLI) schemes, under which the government provides significant grants to encourage investment in key areas. One of the most successful has been in mobile phone manufacturing. Dixon Industries has been successful in gaining large PLI backing and has seen its market share in mobile phone manufacturing rise from zero to near 25% in three years. Contract manufacturers such as Foxconn were the cornerstone of Chinese success: Foxconn employs more than one million workers. These businesses are key to employing vast arrays of previously agricultural migrant workers in China – the same could now take place in India. Can Dixon become India’s Foxconn? There now appears no structural reason why not.

The government’s backing of Indian businesses is brave but far-sighted and increasingly looks like allowing long-term growth to accelerate. We must remember that India still remains at a very early stage of development where simple improvements can lead to dramatic accelerations in economic outcomes. Modi is no darling of the Western press because of his Hindu nationalism. However, Lee Kuan Yew did not have a Western approach to democracy, but he had much success in making Singapore a developed nation. India remains a deeply flawed country, but progress is being made and the long-term opportunity remains vast. This will be fuelled in the years ahead by a new burst of credit growth to fund infrastructure and property investment, which may present new challenges.

Chinese equities are likely to bounce hard at some stage in 2022 but long-term investors should continue to favour India over China.

Vietnam and Indonesia – two stars of Southeast Asia

In Southeast Asia, markets are recovering well after a poor 2021. The most attractive market for this year is Indonesia, where high commodity prices will help fuel an economy that is already recovering. The Indonesian stockmarket has seen several tech IPOs in 2021. These have performed poorly because of Western tech valuation trends – although the recent US IPO of ride-hailing, e-commerce and payments firm GoTo was well received. However, their underlying businesses present wonderful investment opportunities for the bold over the next five years. This also applies to US-listed Sea, the biggest Southeast Asian tech name, which has seen over $100bn knocked off its value since September. This company remains well placed to be the e-commerce, gaming and fintech behemoth in Southeast Asia and Latin America. If one share in Asia has similarity to the Amazon opportunity in March 2001, it is this stock.

While Indonesia has the best momentum now, the most interesting Southeast Asian market on a five-year view remains Vietnam. This was the best-performing market in the world in 2021 and is holding up very well so far in 2022. Its top blue chips, such as retailer Mobile World and IT firm FPT, are performing ahead of the US tech giants on a two-to-three year view. The country has performed a miraculous exit from its zero-Covid strategy and opening-up is under way.

That said, the long-term trends are the key drivers of Vietnam. The country may still be run by a nominally communist party, but the government has the pro-growth inclination of China in the late 1990s and early 2000s. This is mixed with realism: Vietnam saw a property bubble burst in 2007 that set back the country’s development by a decade, but has now led to the Vietnamese dong being the most stable currency in Asia (aided by the country’s large oil fields). Vietnam is the key beneficiary of industrial production being moved from China, whether that be shoes, apparel or electronics. It has also opened a new business line as a cheap but high-quality IT outsourcing hub.

Valuations remain very cheap for early-stage high-growth Asian economies. Mobile World, the country’s dominant retailer, trades on 16 times forecast 2022 earnings with a 20%-plus compound annual growth rate over three years. The equivalent in India would trade on double the multiple. The key valuation catalyst will be Vietnam’s reclassification from a frontier market to an emerging market by index compilers such as MSCI. This process takes time, but will happen at some stage in the next couple of years.

Four top investments in Asia’s growth

Sea (NYSE: SE) is the leading e-commerce and fintech player in Southeast Asia and the second player in Latin America. It recently exited India but will return later this year. The stock has collapsed on worries over profitability in the company’s gaming business and lack of profits in e-commerce. However, the Southeast Asian e-commerce business will turn profitable this year and the gaming business will prove much more resilient. Valuations are now close to the depressed levels of Chinese tech stocks, even though it remains the region’s best hope for a $1trn market-cap company.

State Bank of India (NYSE: SBI) is the largest bank in India. It was mired in bad debts and political intervention but Modi has severed those ties, and SBI is now a leading beneficiary of the improved economic fundamentals. The bank has the largest fintech app and the largest credit card business in the country. The valuation remains at base camp on eight times forecast 2023 earnings and a price/book (p/b) ratio of 1.5, despite a return on equity (ROE) of 17% and rising fast. Private sector equivalents trade on a p/b of three with similar ROEs.

Baidu (New York: BIDU, Hong Kong: 9888) is China’s version of Google. It has a search business that trades on six times earnings, with 30% of the market cap in cash. You effectively pay nothing for China’s leading artificial intelligence and smart car businesses, and the third largest cloud computing business in the country. It also has China’s leading robotaxi business and this will break even in the next year. Baidu therefore looks set to drive China’s efforts to lead the world in autonomous vehicles. Deep value at its growthiest!

Vietnam Enterprise Investments (LSE: VEIL) is the largest UK-listed Vietnam trust and has performed better than the main Vietnamese index over the past three years. It has concentrated positions in banks, property and retail. The banking sector in Vietnam remains a key winner, with the added benefit that Vietnam has a credit-growth quota each year and so a credit bust is extremely unlikely.

Fund managers have always found it harder to outperform in the US than in any other market, which is why so many have chosen to invest via passive funds and exchange traded funds.

The US market accounts for well over half of the MSCI World index, but the intensity of competition makes it hard for anyone consistently to gain an edge. In addition, the largest companies have outperformed in recent years, yet fund managers nearly always tilt their portfolios away from the giants to allow them to invest more in companies that have only a tiny weight in the S&P 500.

An exception to the rule

Still, one fund stands out. Since Tim Parton and Jonathan Simon were appointed co-managers of the £1.5bn JPMorgan American Investment Trust (LSE: JAM) in 2019, they have outperformed the S&P 500 by 3% per year.

The duo manage a portfolio of just 40 stocks, with Parton running the half made up of underappreciated “growth” opportunities, and Simon the half made up of “value” stocks with a “durable franchise”.

Parton avoids stocks without established businesses or visible cash flow. Simon avoids those that are simply cheap. Value includes Bristol Myers and Abbvie in the healthcare sector and Berkshire Hathaway in the financials.

Growth is underweight in technology, but includes agricultural machinery company John Deere and Intuitive Surgical in healthcare. Both keep an eye on the benchmark so Apple is held at a below-benchmark weighting. There’s Mastercard, but not Visa; ConocoPhillips, but not ExxonMobil.

Tesla was recently bought back after being sold last year. JPMorgan Chase cannot be held, but there is a sizeable holding in Bank of America. The value is added in lesser-known companies such as Loews (hotels, insurance, energy and packaging), Weyerhaeuser (the largest listed timber company), Martin Marietta (building products) and Packaging Corporation of America.

Some 5% of the portfolio is invested in smaller companies by a separate team, though this has held performance back recently. The equivalent of 6.5% of net assets is borrowed to enhanced performance.

The overall portfolio valuation is similar to that of the S&P 500, and the average market value of the holding is only 10% less, at $552bn. This makes the solid performance achieved while carefully controlling the risk relative to the S&P500 all the more creditable.

The trust deserves to be a core holding in almost any portfolio, particularly since UK investors tend to be underexposed to the US market as a default consequence of a high exposure to the UK. Those who relaxed about their avoidance of the “expensive” US market when the UK index at last started to outperform earlier this year need to start worrying.

The UK’s relative recovery is starting to look like a flash in the pan due to the poor performance of its financial sector and the carpet-bagging stocks from emerging markets.

American alternatives

There are two other investment trusts focused on North America: Baillie Gifford US Growth (LSE: USA) and Pershing Square (LSE: PSH). Both have performed well in the last three years, but JAM gives the broadest exposure to the US market. US Growth has performed well when growth shares are in favour, but not when value is outperforming. Pershing Square is highly focused – it has just 11 holdings, of which two are below 1% of the portfolio – and often activist in its approach, seeking to bring about change in the companies in which it invests.

However, that is not the case with two recent investments in Universal Music (25% of the portfolio) and Netflix (11%), the theses for which look highly promising. With a three-year return of 124%, PSH’s 30% discount to net-asset-value compared with 3% for JAM can only be described as bizarre.

The remarkable speed at which scientists were able to discover new vaccines and treatments during the pandemic and roll out mass usage seemed to show that there is no medical affliction which is beyond the scope of ingenuity and innovation. This seemed likely to usher in a new golden era for the healthcare sector, and for biotechnology in particular, that would boost the private companies at the forefront of the medical revolution.

Instead the biotech sector is in its biggest bear market in 30 years. In 12 months, the S&P Biotechnology index has lagged the S&P 500 by 64%, falling nearly 50% back to the level of mid 2015. The broader healthcare sector has fared better, thanks to the resilient share prices of big pharmaceutical firms and healthcare service providers. But smaller, innovative companies focusing on research and development rather than shortterm cash flow have suffered.

Time for the tide to turn

In the year to 28 February, the net asset value of Worldwide Healthcare Trust (LSE: WWH) was down 9%, and that of its sister trust Biotech Growth Trust (LSE: BIOG) was down 35%, each 22% behind their benchmark indices. “Fundamentals did not matter,” says Sven Borho, co-manager of WWH. “Everything was driven by macro trends such as growth into value”. In addition to the poor performance of biotech (22% of WWH’s portfolio, 82% of BIOG’s), exposure to the massive under-performance of Chinese companies (8% in both), also hurt the trusts, he notes.

Still, “the healthcare sector now trades on a 20% discount to the S&P 500, the same as in the financial crisis”, says Borho. “Every single time it has traded at such a discount has been the very best time to be invested, especially in innovation and growth.” Meanwhile, the threat of drug pricing reform and regulatory change in the US has lifted. “We are very confident of recapturing much of the lost performance of WWH and BIOG… We have bounced back from setbacks before.”

Controlling the costs

By far the best performer in the sector is the £1bn BB Healthcare trust (LSE: BBH), which is up by 84%, over the past five years. Manager Paul Major has focused on the rising cost of healthcare – which accounted for 10% of US GDP in 1980 but is now 18% – as a key theme. “The compound annual real growth rate of NHS expenditure is 2.25% but needs to be 3.5%.

Thanks to ageing populations, scientific progress and increasing wealth, healthcare is the secular growth story of our age but it needs to be paid for.” BBH invests in firms that “provide innovative solutions for broken healthcare systems around the world”. For example, healthcare waste in the US is estimated at $750bn per annum.

“The political discussion in the US is about prescription drugs but they only account for 10% of total spending. Hospital care accounts for 31% and physicians and clinics 20%.” This is where efficiency can improve, says Major. “Hospitals are expensive and nobody wants to be there, so newer care models are needed. The first interaction of patients with healthcare needs to be online.”

Other areas of focus are diagnostics, patient monitoring, disease prevention and changing behaviour. “People do not follow medical advice or behave rationally so they need to be nudged. For example, 15% of those with cancer in the US are not receiving treatment. Sensory technology can be used for monitoring the treatment of patients so that their arrival in hospital represents a last resort.”

Other areas of focus are diagnostics, patient monitoring, disease prevention and changing behaviour. “People do not follow medical advice or behave rationally so they need to be nudged. For example, 15% of those with cancer in the US are not receiving treatment. Sensory technology can be used for monitoring the treatment of patients so that their arrival in hospital represents a last resort.”

The first quarter of 2022 is over.

It's a natural point at which to take stock of what's happened in markets.

It's also a completely arbitrary point, of course. Just because markets have been doing something over the past three months doesn't mean they'll keep doing it.

Yet, arbitrary or not, taking a snapshot of markets can give us an idea of what the overall narrative is at any given time.

And it's very clear from the first quarter of this year that the big stories in investment are now dramatically different to the ones that drove the post-2009 bull market...

The FTSE 100 is doing well – what's gone wrong with the world?

One of the most obvious changes in the investment environment is that the UK's headline stock market index isn't clutching tightly to the wooden spoon for once. That's quite the shift.

During the first quarter of 2022, the FTSE 100, which comprises the 100(-ish) biggest (in terms of market capitalisation) companies listed on the London Stock Exchange, gained 1.8%, notes George Steer in the FT.

You may not be cracking open the champagne on that sort of gain (certainly not with inflation sitting at its present levels). And if you'd been more adventurous, investing in Brazil say, you'd be up a whopping 34.3%, says Morningstar.

But it's rather a lot better than if you'd invested in most other major developed global stock markets – or British ones for that matter.

The FTSE 250, which comprises the next 250(-ish) companies, lost 10.6%, while the biggest companies on Aim – London's junior market - lost an even more brutal 16%.

As for international comparisons, eurozone stocks (as measured via the Stoxx 600 index) fell by 6.5%, while the S&P 500 dropped 4.9%.

There's a pretty straightforward story to tell here. The FTSE 100 has done reasonably well for two main reasons. One is that it has been the least popular developed market in the world for a long time now, so it was starting from a low base. That shunning was partly due to Brexit.

Two - which has nothing to do with Brexit – is that it is full of the sorts of stocks that everyone has hated for the duration of the post-2008 bull market. The FTSE 100 has banks (at the heart of the last bubble); miners and oil companies (hated because they're the opposite of both ESG and "digital" assets); and a distinct lack of hot tech stocks.

Oh and it's a dividend-heavy index in a world that had decided that regular payouts to investors showed that a company had run out of imagination.

So in a world where investors have decided that "value" investing is a dirty word, it's little surprise that the FTSE 100 index was hated.

Clearly that's changing now. Even before Russia invaded Ukraine, commodity and energy prices were surging. Inflation finally stopped being described as "transitory" in December last year as the Federal Reserve "retired" the word.

Meanwhile, on the other side of the equation, anything speculative (in other words, any asset where profits are a distant prospect) has struggled. "Growth" has lost its popularity. "Virtual" has become less appealing. "Expensive" is no longer a synonym for "high-quality".

This helps to explain why the US in particular – previously the world's leading stock market by far – has started to struggle. It's far more "growth-y" and "tech-y" than the FTSE 100.

The trend is clear. The rationale is pretty clear too. The big question now is: is it likely to continue?

How to invest for a continuing shift to value from growth

On the "big picture" level, a lot of this boils down to what you think will happen to interest rates, inflation and the economy over the coming year.

If you think that inflation will drop back down and that the world's central banks are going to be clear to cut interest rates, but that we'll scrape by avoiding a recession, then we could probably flip back to the good old days of growth trumping everything and everything being hunky-dory in a slightly glum manner.

If you think that inflation will persist, that central banks are caught between a rock and a very hard place, and that we might end up with the economy being dragged down by soaring living costs even as staff agitate for higher pay to compensate and countries scramble to secure scarce supplies of key resources – well, we can probably expect more of the same.

I'll admit I find scenario number two or some variation thereof the most likely option here. I would prefer a more cheerful outcome (and if wages start rising in a persistent manner, that would make me more optimistic about the economy, if not about earnings prospects).

But overall, it's hard to see how we go back to the previous "secular stagnation" scenario which sounded very gloomy but in practice, entrenched the dominance of the top performers and wasn't much of a problem as far as Wall Street was concerned.

How do you play this? We've looked at lots of ways to play lots of different commodities, from copper to silver and platinum. You could also invest in value-oriented investment trusts or those which are aimed at protecting you from inflation.

The other option is to look at a simple FTSE 100 tracker fund. It won't give you pure exposure to all of the things that will do best out of any shift from growth to value, but it is a cheap option for investing in the overall shift.

On that note, for more on the debate over passive investing and its impact on markets, you really should listen to this week's MoneyWeek podcast, in which Merryn chats to Robin Wigglesworth, FT journalist and author of Trillions, an in-depth history of index investing and its impacts. Have a listen here.

“The expectation going into this year was that we would see inflation peaking in the first quarter and maybe levelling out” before cooling in the second half of the year, US Federal Reserve chair Jerome Powell said this week. “That story has already fallen apart.” With annual inflation running at 7.9% in the US and 6.2% in the UK and global commodity prices surging because of Russia’s invasion of Ukraine, central banks around the world are being forced into inflation-fighting mode.

Last week the Fed raised interest rates for the first time in four years, while the Bank of England delivered a further 0.25 percentage point hike to 0.75%. This week Powell suggested that the Fed could even serve up a half-point increase (rather than the usual quarter-point increment) at a future meeting if it felt inflation was running out of control.

Don’t mention the war

The key message from central bankers in Europe and America is that the war in Ukraine will not derail their plans to tighten monetary policy, says Neil Shearing of Capital Economics. The risk is that this cycle of interest-rate rises will end up causing a recession. The “lessons from history are troubling”. Of the 16 tightening cycles done by the Fed, Bank of England and European Central Bank since the late-1970s, 13 ultimately ended in recession.

The Bank of England now projects that UK inflation could hit 8% in the coming months, four times the 2% target, says Mehreen Khan in The Times. Even “double-digit inflation” looks a possibility later this year, for the first time since the early 1980s. But critics think the Bank is “dangerously behind the curve on taming inflation”, with the Bank’s reference to “further modest tightening” taken as an indication that it intends to hike less quickly than the Fed from now on. “The Ukraine crisis has changed the mood.” Markets are now expecting UK rates to be around 2% come the end of the year, down from a forecast of 2.5% previously.

Stocks are on thin ice

Tighter monetary policy has caused bonds to sell off as markets demand higher yields. US two-year Treasury notes are on course for their worst quarterly performance since 1984. Yet surprisingly stocks have so far avoided the pain, with US markets enjoying their best week since November 2020 last week and continuing to rally this week. In Europe, the Stoxx 600 index has erased its post-invasion losses. In another sign that markets have digested the invasion shock, the Vix index of expected volatility derived from S&P 500 option prices – dubbed Wall Street’s “fear gauge” – has fallen back to early February levels.

Higher interest rates should be “terrible for stocks and even worse for unprofitable tech shares”, says James Mackintosh in The Wall Street Journal. So why is even Cathie Wood’s ARK Innovation ETF of highly speculative stocks enjoying a bounce? Some traders are going bargain-hunting: over the last 30 years, they have got used to buying dips on the expectation that the Fed will “ride to the rescue” if stocks tank. But with central banks now focused on fighting the inflationary peril, buyers shouldn’t count on a “Fed backstop” this time.