Joe Studwell is a development economist at Africa Urban Lab, a research centre at the African School of Economics, Zanzibar. He is also a founder and director of the Asian research and advisory firm Gavekal Dragonomics. His books include The China Dream, Asian Godfathers and How Asia Works. How Africa Works: Success and Failure on the World's Last Developmental Frontier is published by Profile Books (£25).

Matthew Partridge: The thesis of your book How Africa Works is that Africa is finally starting to take off economically.

Joe Studwell: We've already seen an uptick in growth in the last 20-30 years, as well as a move to more consistent growth as Africa becomes less dependent on minerals. We don't know at what level continental growth will settle, but I suspect across the 55 countries, we can now expect to see growth averaging something over 4% per annum, with some countries expanding at the sort of rates we associate with East Asia: 9%-10%.

Matthew Partridge: There have been several occasions over the past few decades when it looked as though Africa had finally reached take-off speed, only for it to fall back. How is it different this time?

Joe Studwell: This time the demographic story is different. The central thesis of the book is that demographics have been the main constraint on the continent. African population density in 1960 was equal to Europe's in 1500, so it was unrealistic to expect sustained growth.

But by 2030 the population density of Africa will be equivalent to that of Asia in 1960, and of course Asian density then tripled during its period of fast growth. What's more, while most African countries still aren't well governed, a handful are – and even the poorly governed are still enjoying faster growth.

Matthew Partridge: So, is urbanisation going to drive growth?

Joe Studwell: Yes. Cities are the big drivers of growth in Africa, with the pace of urbanisation faster than anywhere else. You get a much more efficient division of labour within cities, as well as more affordable infrastructure, and then you get higher-yielding agriculture in the surrounding areas as the proximity to the market encourages people to put lots of fertiliser on the land.

Matthew Partridge: Returning to demographics, do you think Africa's younger population, compared with Asia's and Europe's ageing ones, is a positive?

Joe Studwell: It's a positive. But the sweet spot will be when Africa's population matures, so you get a lot of people aged 15-64, the most economically active age. That maybe a little way down the line. What's more, while you do get younger people pushing for political change, Africa is already more democratic than Asia was at the same level of economic development.

Part of the reason for that is the ethnic diversity in Africa. With the dominant ethnic groups accounting for less than 30% of the population in some cases, it makes autocracy much harder to maintain than in East Asia, where ethnic minorities comprise less than 5% of the population.

Matthew Partridge: Africa has received large amounts of investment from China and the Middle East. Do you think that's helping to drive growth?

Joe Studwell: Foreign direct investment is important. It's not just the hard currency that comes in, but also the knowledge. And Chinese firms often say they are interested in Africa because margins are better than they are in China, where manufacturing is phenomenally competitive. The Middle East is branching out into services such as ports and real estate. Hopefully this will be supplemented by more European and US investment down the road.

Matthew Partridge: Could Chinese investments be a Trojan horse? Does China secretly want to secure dominance of those areas?

Joe Studwell: I don't think there is any evidence of some grand strategy. I think that China today is like Korea and Japan before it. It has massive surplus manufacturing capacity and vast amounts of foreign exchange. It is keen to move into both foreign markets.

And just as the Koreans did in the Middle East in the 1970s and 1980s – and the Japanese in Southeast Asia in the 1960s and 1970s – China has decided that Africa is the most natural target for its manufacturing and foreign-exchange surplus. What's more, while there has been some investment by the Chinese state, most of it is spearheaded by China's private companies

Matthew Partridge: You talk about some of the biggest success stories: Botswana, Rwanda, Ethiopia, Mauritius. What do you think are the key lessons from their success?

Joe Studwell: The thing about Africa is that there is no special African recipe, just the approach that worked well in Asia and in Europe after World War II. This was the emphasis on smallholders' agriculture and raising the intensity of production and yields, combined with a focus on manufacturing as a major job creator.

What I found in Africa was that context is very different. All the successful countries have leaders who managed to forge cross-ethnic coalitions. While this wouldn't be necessary in a country such as China where 95% of the population is Han Chinese, it is necessary in Botswana or Ethiopia or Rwanda, as you've got to bridge these big ethnic gaps if you're going to get political traction and enduring policy.

Matthew Partridge: What went wrong in the African countries that haven't succeeded?

Joe Studwell: The application of developmental policy requires leaders who believe in the possibilities of development, and many of the countries that failed couldn't construct cross-ethnic national coalitions to that end.

Worse, you had some utterly dysfunctional countries, such as Sudan or Somalia today where there's so much political disagreement and violence that there's no chance to get anything moving to promote development. This is a tragedy. Sudan has agricultural and manufacturing resources that could easily translate into a 10% growth rate.

But between the failed states at one extreme and a country such as Ethiopia (which will grow at 10% this year) at the other, there's an awful lot in the middle. Nigeria had a horrific civil war in the 1960s and has had governments that have since struggled to bind the ethnically diverse population together. But there is nonetheless a private sector going from strength to strength, with Aliko Dangote, the richest man in Africa, building the first economically successful petroleum refinery in Lagos, something that the government has struggled to do. He is active in a host of other businesses as well.

I'd urge everybody to go to Lagos because it's such a wild and remarkable place, with more than a fifth of the Nigerian economy in just one city. It is often said that everybody in Lagos wakes up that morning not quite sure how they'll eat that day, yet everybody seems to. Kenya would be another example. It is a largely mismanaged state, but with a vibrant private sector and lots of growing firms doing very interesting things.

Matthew Partridge: You talk about the role of governments in promoting manufacturing and industrialisation, but hasn't the state been very bad at picking winners?

Joe Studwell: Nobody who ran a good industrial policy ever set out to pick winners. Instead, you provide a subsidy and support in the context of competition between firms that are receiving that subsidy, and then you let the market decide who wins. You also pressure them to export, as manufactured exports are the most competitive part of the world economy.

But it's true that where it goes wrong, it tends to go wrong because governments fail to understand the role of competition and they do indeed try to pick winners. We had a case of that in Ethiopia with the huge state conglomerate Metals and Engineering Corporation (Metec), which was working on all the sugar mills for the sugar plantations that were being built. But the government has learned there, and is now splitting Metec up into four divisions, which will compete with each other and against other firms.

Matthew Partridge: Which African countries look the most interesting now from an investor's point of view?

Joe Studwell: I'd be reluctant to say. What's more, as we saw in East Asia, the most successful developing countries will take quite a long time to produce a good return for portfolio investors because they retain capital controls and they manage their banking system to direct credit to manufacturing and smallholder agriculture – policies that focus on the long-term good of the country rather than simply maximising investors' returns.

So, you could put money into African banks in countries with liberalised financial systems and you'll probably do quite well. But generally, Africa requires a lot of hard work because top-quality information about African companies is in relatively short supply. I think financial-services firms should be opening small offices and just having a look around rather than trying to woo people to put their money into what remain broadly frontier markets.

Matthew Partridge: How can the rest of the world help Africa to keep growing?

Joe Studwell: I hope that multilateral and bilateral institutions talk to African governments about what they really need and what their ambitions are, rather than turning up with shopping lists of what they think governments should be doing, which has been the weakness of all those institutions around the world.

Moreover, there's not much appetite in multilateral and bilateral institutions for supporting smallholders' agriculture or industrial policy. The latest trend in aid seems to be to treat aid like private equity. Bilateral donors give money to private-equity firms today on the basis that this constitutes a useful contribution to economic development, and I'm not sure that it does. Still, it doesn't matter too much, as the good news about African economies is coming from within Africa.

Matthew Partridge: In 20 years or so, once growth has started to feed through, how do you think the rise of Africa is going to reshape global politics?

Joe Studwell: In 2050, Africa is likely to have 2.5 billion people, up from 1.5 billion today. When we reach 2100, there will be four billion people in Africa, four billion people in Asia, and only two billion in the rest of the world. So, Africans will be demanding to be heard.

But I think what we need to recognise is that Africa is also going to take Asia's crown as the most diverse region of the world in terms of development. There is a huge difference today between the situation in Myanmar and that of Japan, Taiwan or South Korea. That's what we should expect with Africa in the future. We won't talk about Africa as a single monolithic entity; we will discuss it in the same way we tend to talk about East Asia or Southeast Asia.

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Andy Burnham will have a lot of important jobs when he steps into Number 10. One of them will be to try to fix the UK’s apparently broken stock market.

The persistent undervaluation of UK stocks may provide buying opportunities for investors, but it seems to be overseas institutions that are taking advantage, rather than the country’s own DIY investors.

EasyJet (LON:EZJ) is the latest British company to be the subject of an opportunistic takeover bid from a foreign private equity firm. It is unlikely to be the last.

Analysis from stockbroker Peel Hunt showed there have been £165 billion worth of takeover bids for British companies since the start of 2023. In that time, there have been 11 initial public offerings (IPOs) with a combined value of £6 billion. That amounts to a massive shrinking in value of the UK market.

“To say that the UK has a problem in retaining its companies and listing new ones would be a massive understatement in our view,” Charles Hall, head of research at Peel Hunt, stated in a report.

“The situation on the London market is now so serious that it requires bolder interventions to save our stock market,” said Richard Stone, chief executive of the Association of Investment Companies (AIC), an industry body that represents the UK’s investment trusts.

Why aren’t British investors buying their own stock market, and is there anything Burnham can do to change that?

Why aren’t Brits investing?

Part of the problem is the is a lack of investing culture in the UK. The Starmer government attempted to solve this by launching a retail investment campaign, fronted by the mascot Savvy the Squirrel.

It doesn’t seem to have worked, and the disruption in Downing Street appears to be making Brits even more cautious. Research from investment platform IG shows that nearly one in four British investors (23%) have changed their investment allocation as a result of political uncertainty.

“Rather than simply expressing concern about the outlook, many retail investors are actively reassessing where they want their money invested,” said Chris Beauchamp, IG’s chief market analyst.

UK investors have multiple sources of uncertainty to contend with. As well as domestic political upheaval, there is also the persistent geopolitical tension in the Middle East as well as the spectre of persistent inflation.

“That doesn't necessarily mean investors are abandoning risk altogether,” said Beauchamp. “Many continue to look for long-term growth opportunities, but confidence in UK markets will depend on greater political and economic certainty over the months ahead.”

What could Burnham do in order to save the UK’s stock market?

Industry leaders have called on Burnham to reform the tax system around UK stocks in order to encourage domestic investors to buy the country’s shares.

“Abolishing stamp duty altogether would give the biggest financial return to the UK economy by encouraging more investors to buy UK equities and drive economic growth,” said the AIC’s Stone, who also called for reforms to the rules that impact investment trusts and venture capital trusts (VCTs).

He highlighted that investment trusts are currently subject to “onerous double taxation” as they pay stamp duty when they buy UK-listed shares, and investors are then charged stamp duty when they buy the shares of the trusts themselves.

“It’s vital to support businesses at an earlier stage of their growth journey by reversing the decision to reduce tax relief on VCTs,” said Stone. “The cut in tax relief from 30% to 20% is expected to lead to a sharp decline in funding for VCTs, which provide the capital to growing businesses as they scale up and prepare to list on the stock market.

“If we don’t support our home-grown companies, we reduce the chance of seeing successful IPOs on our domestic market,” Stone continued. “We will also continue to see home-grown businesses head overseas, leading to the UK missing out on job creation and wealth.”

Our philosophy at the Guinness Emerging Markets Equity Income fund is based on identifying quality firms, defined as those that have consistently generated returns on capital above their cost of capital.

Such companies tend to pay sustainable dividends because of the cash profits they generate. This sets our approach apart in emerging market stocks, which are often characterised by pronounced volatility.

We avoid rollercoaster cyclical sectors and focus on businesses with stable, consistent financial characteristics that can weather different market environments.

Three emerging market stocks to consider

Largan Precision (Taiwan: 3008) is a Taiwanese manufacturer specialising in the design and production of optical plastic lenses and is a key supplier for Apple. Largan's core business has been the smartphone market, but it has recently been expanding into co-packaged optics (CPO) technology.

CPO is essential for data transmission between AI chips and has proved to be more energy-efficient and less heat-producing than copper wires. Exploiting its existing expertise in precision optical lenses, Largan is developing in-house technical capabilities to manufacture fibre array units (FAUs), a central component of CPO, which may prove to be a crucial element for determining success.

Both the momentum behind FAU technology (currently in client testing) and the continued demand from smartphone manufacturers should help Largan to maintain its growth rate. This can be seen in its recent share-price performance, with the stock gaining 44.1% (in sterling terms) over the year to the end of May.

Arca Continental (Mexico City: AC) is one of the largest Coca-Cola bottlers in Latin America and has delivered consistent returns, gaining 22.4% (in sterling terms) in the year to the end of May. The brand itself provides a structural moat, with its pricing power derived from distributing one of the world's most recognised consumer brands.

Additionally, marketing investment from Coca-Cola itself is at a level that would be impossible for Arca to replicate. This is complemented by geographic diversification across the US and Central and South America. A fragmented bottling market in Latin America offers Arca opportunities for expansion through the consolidation of smaller bottlers.

Brasil Bolsa Balcão (São Paulo: B3SA3), also called B3, is Brazil's sole stock exchange. It integrates exchange, clearing-house and depository functions under one entity, making it structurally irreplaceable within the domestic market. Nearly all organised trading and over-the-counter registration of securities in Brazil flows through its systems. Diversification into data analytics and payments – via Trillia, B3's internally formed data-analytics division, and the acquisitions of Shipay and CRDC – provides a buffer against cyclicality in exchange-traded volumes.

Brasil Bolsa Balcão is also competitive on a global scale, having overtaken India's National Stock Exchange to become the world's largest derivatives exchange by volume in 2025. High Ebitda margins, sustained returns on capital and Brazil's growing retail-investor base underpin the long-term investment case. The shares have gained 33.2% in sterling terms in the year to the end of May.

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EasyJet has put up a good fight. Over the past two months, its board has turned down a series of higher and higher offers from Castlelake, a US investment firm with more than $25 billion in assets. On Monday, it finally blinked. The board said it was minded to accept the latest £5.2 billion offer, and serious negotiations will now start to tie up the sale.

There are still obstacles. Castlelake needs to find a way of complying with EU rules that state that airlines based on the continent have to be majority-owned by European shareholders. It will need to be cleared by the British competition regulators. And it will still have to be put to a vote of shareholders. But if those can be overcome, easyJet will disappear into an American firm specialising in asset-based investments, including aircraft leasing.

That is good news for anyone with easyJet shares. The share price has risen by more than 80% since the lows touched in May before the takeover talks were revealed. And Castlelake may well prove a decent long-term owner. But it is a bad deal for the British economy more widely.

EasyJet is one of the most successful British companies of the past 30 years. It has built one of the best route networks in Europe, with a strong brand, and is well positioned in one of the continent's fastest-growing industries. With 90 million passengers a year, it is already the fifth largest airline in Europe, just behind Air France-KLM and slightly ahead of Turkish Airlines, and has an unblemished safety record.

Perhaps most importantly, it has carefully positioned itself in the middle of the market. It is a lot cheaper than the traditional national carriers, but it also offers a slightly more civilised experience than the hyper-aggressive approach of Ryanair. It has occupied the middle market, with lowish fairs and acceptable service. For most industries, the middle market is where, over the long run, the most money is made, and there is no reason to think that aviation will turn out to be any different. As European air travel steadily grows, and if its mid-market, low-cost model can be replicated in US or Asian markets, then it also has the potential to grow.

Over the last few years, investors have been far too quick to sell out British companies. In the past few months alone, sugar manufacturer Tate & Lyle has been sold to US rival Ingredion; Intertek has been sold to private-equity firm EQT; and Evoke, the owner of the William Hill betting chain, has been sold to Greek casino operator Bally's Intralot. This week Sky's American parent Comcast agreed to buy ITV, Britain's largest commercial broadcaster. The list keeps getting longer.

EasyJet shareholders should reject the deal

We can all understand why. Britain has become a very hard place to make money. The economy has stagnated, real wages are barely growing and the government is determined to squeeze more tax out of companies wherever possible.

It is surely worth reflecting that if easyJet did not have to pay higher national insurance charges, if rates at airports (a £40 million rise last year at Gatwick, one of its main hubs) had not been increased so much that they were passed on to airlines in landing fees, and if air passenger duty has not gone up by so much (rising another £2 a ticket on short-haul flights in the last Budget) then its profits would have been significantly higher, and it would not have been a target for a takeover in the first place.

Likewise, a moribund, over-regulated stock market means many basically good businesses are undervalued by global standards. One by one they get taken over by foreign rivals and there are no new companies coming along to replace them. Britain's economic base is steadily getting hollowed out.

Britain can't afford to lose easyJet. It may not exactly be a national treasure, but it is a decent business with a solid future. If we had lower taxes on businesses, if the stock market was deregulated, and if demand started to grow, British firms would not be quite so vulnerable to foreign predators.

Just for once, perhaps the airline's shareholders should reject the advice of the board and demand that it remains an independent company listed on the London stock exchange.

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The UK’s Defence Investment Plan (DIP) will boost UK defence spending to £80 billion by 2029 – but that figure is still set to fall short of the NATO target of 5% of GDP.

It sits nonetheless in the context of rising defence spending across the world.

“Global military expenditure hit a record $2.9 trillion in 2025, the 11th consecutive year of growth,” Tom Bailey, head of research at ETF issuer HANetf, told MoneyWeek (citing figures from the Stockholm International Peace Research Institute).

Much of that increase was driven by Europe; military spending rose 25% across the continent in 2025. But the UK’s defence spend fell 2% in the year.

“Even over the longer term, the UK’s increase looks relatively modest. UK defence spending is up 32% over the past decade, but that compares with much sharper increases in countries such as Germany, Poland, Spain, Japan and Italy,” said Bailey. “If Britain wants to remain a serious global military power it has to increase defence spending.”

This imperative has prompted criticism of the DIP. Former defence secretary John Healey and armed forces minister Al Carns both resigned their posts on 11 June, with Carns saying afterwards the bill was not sufficiently funded and the government was planning to spend money on outdated systems and Healey saying the bill “falls well short of what is required for defence and the country at this dangerous time”.

Fixing the defence spending deficit won’t be a case of waving a magic wand for Andy Burnham, who is widely expected to become the UK's next prime minister.

“Fiscal constraints and sluggish economic growth means it’s not just a simple question of increasing spending,” said Neil Wilson, UK investor strategist at investment bank Saxo. “Debt markets will punish extra borrowing – Starmer pointedly [ruled] out ‘war bonds’ as just extra debt. Germany’s decision to scrap a new warship programme underlined the problem facing governments without the same level of fiscal constraint.”

What does the Defence Investment Plan contain?

Having initially been expected at the end of last year, the DIP was delayed as the Ministry of Defence (MoD) had been pushing for an additional £28 billion of defence spending over the next four years but the Treasury would only permit £10 billion.

In its current form, the DIP allows £298 billion of investment into defence over the next four years – £15 billion in additional spending.

The bill includes provision to spend £20 billion more on the country’s nuclear deterrent over the next four years compared to the previous four, including the purchase of F-35A stealth fighter jets – capable of carrying nuclear warheads.

It also contains £5 billion of investment in drones and autonomous systems over the next four years.

“That may look modest beside the roughly $55 billion for the US’s multi-year Drone Dominance programme,” said Bailey. “But measured against each country’s previous annual defence spending, the UK number does not look small, being roughly 7.5% of 2025 UK defence spending, compared with around 5.8% for the US figure. As a share of GDP, both are also very similar.”

There is also £3.2 billion allocated for space capabilities and £2.5 billion for cyber and electromagnetic defences.

Which companies could benefit from higher UK defence spending?

UK defence spending tends to be quite internationalised with an understandable slant towards domestic companies.

“Since 2019, around 45% of MoD procurement spending has gone to UK-headquartered firms,” said HANetf’s Bailey. “Higher UK spending can benefit UK-listed names but also foreign-listed companies with meaningful UK defence exposure.”

There is a notable attempt to shift from over-reliance on US firms – understandable given the US’s unpredictable foreign policy so far this year.

In terms of the companies that could be expected to benefit, BAE Systems (LON:BA.) is notable due to its central role in the design of the Tempest jet being made jointly by the UK, Italy and Japan. Its shares rose nearly 10% between 29 June and 2 July.

Besides BAE Systems, Wilson also highlights Chemring (LON:CHG) as a potential beneficiary of the MoD’s more technological shift.

“We see Chemring, a specialist in sensors, electronic warfare and counter-drone technology, coming out of this rather well,” he said.

“Rolls-Royce (LON:RR.) gets a lift from nuclear power/Tempest engine considerations, while QinetiQ (LON:QQ.) is one to watch in the field of artificial intelligence, robotics and autonomous warfare,” he continued.

He also highlights some interesting prospects further down the market capitalisation ladder, including SpaceX supplier Filtronic (LON:FTC), Concurrent (LON:CNC) – an embedded computing specialist with significant defence contracts – and MS International (LON:MSI) which, among other things, manufactures navy guns.

Why hasn’t the defence bill boosted UK defence stocks?

These stocks, on the whole, haven’t risen off the back of the DIP.

If anything, the opposite is true. Despite its initial surge after the DIP’s announcement, BAE Systems is up just 2.4% in the 12 months to 8 July. Rolls-Royce is up a healthy 45% over the same period but most of these gains predate the DIP’s publication; between the DIP’s publication and 8 July, the stock fell 1.1%.

Chemring’s share price fell 2.1% over the year to 8 July, while Qinetiq is down 5.3%.

The main reason the DIP hasn’t lifted these stocks substantially is that it was fairly underwhelming. Markets had expected a much more substantial uplift in UK defence spend, and this became priced in.

“Shares in various defence contractors rose last year on expectations for more spending, but lately investors have been left disappointed,” said Saxo’s Wilson.

How to invest in UK defence stocks

Besides buying the shares directly there are few pure-play routes to investing in UK defence.

You could pick an exchange-traded fund (ETF) that offers some exposure.

Two obvious examples are the HANetf Future of European Defence Screened UCITS ETF (LON:NAVY) and the WisdomTree Europe Defence UCITS ETF (LON:WDEP). Both these are specialised in European defence companies; whereas a global defence ETF like iShares Global Aerospace & Defence UCITS ETF has less than 12% of assets invested in the UK (as of 7 July), NAVY and WDEP have approximately 25% of assets (both as of 8 July).

Open-ended funds and investment trusts focusing on defence are thinner on the ground.

JPMorgan Claverhouse (LON:JCH) also offers some UK defence exposure through holdings like Rolls-Royce, Serco (LON:SRP) and BAE Systems – though as of 31 May these three stocks make up just 7.7% of the portfolio.

Whilst only tangentially related to defence, Seraphim Space (LON:SSIT) holds private companies that relate to the space technology theme. Some of these overlap heavily with defence; All.Space, for example, has contracts with the MoD as well as the US Department of Defence.

In a major speech on Monday, Andy Burnham, our prime-minister-in-waiting, at last deigned to give us some clues about his plans for the country, including a massive transfer of power to the cities and regions. Apparently, the key to unlocking growth is to devolve power to city mayors and local councils and a proposed “No. 10 in the North”. Burnham promises a programme of council-house building, to bring the utilities under tighter public control and to restore the high street to its former glories.

There was a lot of waffle and not much in the way of concrete proposals, but he was at least trying to seriously address some of the structural flaws in the British economy.

And he is not just trying to chuck money at the issue, as most of his predecessors have done, even if the main reason is that the money has unfortunately run out. The problem, however, is that the country does not actually need more devolution. What it needs is more wealth creation.

Andy Burnham is repeating a failed experiment

There are three major problems with a focus on the regions. First, Britain has already had a 25-year experiment in devolution, with both Scotland and Wales having their own governments and assemblies and, in the case of Scotland, even limited powers over taxation. And the results? Unfortunately, dismal.

Scotland's growth has started to lag the rest of the UK, while spending has grown so fast that were it an independent country, its deficit would be running at an alarming 9% of GDP. As for devolved tax powers, it turns out they are only ever used to make taxes go up, not down.

As for Wales, it has been even worse, with close on 20% of the working-age population now living on benefits, traditional industries wiped out, and with living standards that are now among the lowest in Europe. If devolving power was so great for the local economy, there is not much sign of it so far.

Next, devolution will just create yet more government and more spending. Devolution in Scotland and Wales has mainly created just an extra layer of politicians, all of whom have to justify their existence by spending more money and passing yet more regulations. That is how Wales ended up with a 20mph speed limit in urban areas right across the principality, even if it slows down commerce by adding to the cost of every delivery. Or how Scotland ended up with rent controls even though they never work. It seems extraordinary that anyone could look at Britain in 2026 and decide that what it really needed was yet more government and higher levels of spending. Yet that is Andy Burnham’s only prescription.

Andy Burnham is micro-managing decline

What the British economy needs is not more power for the regions, but more power for businesses and consumers. With all his talk of “ending 40 years of neoliberalism”, it seems to have escaped Andy Burnham's notice that the government has never been more powerful than it is now. It accounts for 45% of GDP directly and micro-manages trade and business in a way that it never used to.

Take the living wage. According to a recent report from the Centre for Cities, in 42 of Britain's 63 largest cities the living wage is now above two-thirds of median earnings. In effect, what everyone earns is now decided by the government.

Or take energy prices. What you pay as a consumer is determined by the price cap from Ofgem, and the amount factories pay is decided by a complex series of green levies, and the wholesale price for wind and solar is set by a range of long-term, state-controlled agreements.

In Scotland, the government is planning price caps for basic foods and it probably won't be long before that is introduced nationwide (the chancellor has already publicly criticised the supermarkets for raising prices too quickly). The number of prices that are set in a free negotiation between the buyer and seller, which is the way it is meant to work, is getting smaller all the time.

It is hard to see how yet more state intervention is going to help anyone. If this is the best that Andy Burnham has to offer, it is going to be a long, hard slog until the next election.

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What exactly is an emerging market? You can debate all sorts of measures of economic development and levels of income as the cut-off point, but as far as the financial world is concerned, what matters most is whether the stock market is part of the MSCI Emerging Markets (EM) index or not.

The AI boom is starting to stretch this line of reasoning, as we have noted a few times in recent weeks. The performance of a handful of stocks that are integral to the semiconductor sector means the index is increasingly heavy in tech (now 43% of the total). It has almost 50% in two economies – Korea and Taiwan – that are clearly advanced, wealthy countries. Yet while AI has made this very obvious because of its impact on the index, the underlying point has been true for much longer. Korea and Taiwan are “emerging” under MSCI's market-access criteria, but they fully emerged in an economic sense a while ago.

Is China an emerging market?

You can go further. The third largest weight is China, at about 20%. China's GDP per capita in purchasing power parity (PPP) terms is still firmly in emerging market territory – it's about half of the UK's, for example – but this disguises enormous variation between the wealthier coastal provinces and those further inland. It is also by far the world's second-largest economy in nominal terms. To what extent can we view it as a traditional emerging market?

Note, too, that all these three countries – almost 70% of the index – are in East Asia. At this point, is the MSCI EM vastly different to the little-quoted MSCI AC Asia, which adds nearby Japan into the mix? The chart above suggests not.

A “true” emerging market ETF

The practical investor may be happy enough. After all, if returns are good, why split hairs about definitions? Yet it's important to understand where returns are coming from, how an end to the AI boom might change this, and what the options are if you want more traditional emerging market exposure.

I have previously mentioned Barings EMEA Opportunities (LSE: BEMO) and BlackRock Frontiers (LSE: BRFI). Both are interesting, but neither is broad (BEMO is Eastern Europe, Middle East and Africa, while BRFI excludes the eight largest emerging markets).

Instead, we could look at a relatively new exchange traded fund (ETF): WisdomTree True Emerging Markets (LSE: WEMP). This drops China, Korea and Taiwan, with India and Brazil as the largest positions. There is very little tech; you get a classic emerging-markets portfolio with more than 35% in financials.

To my mind, this goes too far for most investors as a standalone holding. It might be preferable to just cap exposure to the big three. Still, owning this alongside a conventional EM fund would be one way to get more balance in a portfolio.

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Assuming no Labour MP throws their hat into the ring to challenge him, Andy Burnham looks set to be the UK’s next prime minister – and he could assume the office as soon as 17 July.

You might be wondering what a Burnham administration could mean for your money, in particular your investments. After all, the UK’s stock market has had an eventful year so far: the FTSE 100 reached its all-time high of 10,935 on 27 February, just before the Iran war broke out. It fell off sharply over the following weeks, and while much of the lost ground was recovered by the end of March, it still has not regained its late February highs.

UK stocks have been undervalued compared to international counterparts for some time, and while that’s a positive for value-focused investors, the hope is that something will, at some point, catalyse a revaluation so their prospects rise.

Could the UK’s seventh prime minister in 10 years be that catalyst, or is it more unwelcome news as far as the UK’s stock market is concerned?

“If Andy Burnham does get the keys to Number 10, he'll face a supremely tricky balancing act,” said Susannah Streeter, chief investment strategist at wealth manager Wealth Club.

The apparent prime-minister-in-waiting outlined his vision for the country on 29 June in a speech that majored on strengthening regional autonomy, but was otherwise light on detail.

“Investors will be looking for a clearer roadmap showing how growth can be boosted sustainably without unsettling bond markets or putting further strain on already stretched public finances,” said Streeter.

How UK stocks have reacted to the prospect of prime minister Burnham

There is widespread skepticism about how effectively Burnham can meet these challenges. Equally, it is yet one more source of turbulence for a market that could probably do without it.

“I think what the markets would like to see is some stability,” Jo Rands, portfolio manager on UK equity income at asset manager ClearBridge Investments, told MoneyWeek.

It is notable, though, that UK stocks have not reacted strongly (in either direction) since Keir Starmer announced he would step down, and Burnham emerged as his almost nailed-on replacement.

While some sectors have experienced jitters – Rands highlighted potential nationalisation concerns impacting the utilities sector – on aggregate there has been little reaction. The FTSE 100 gained 0.7% on 22 June, the day Starmer announced his resignation, and rose a further 0.6% between then and 30 June.

“The markets have been thinking about this potential change for a while,” said Rands. “Last year we were talking about the risk for UK equities thinking about the local elections, and the implications that could have on the market. So it’s been rumbling away in the background.”

Uncertainty itself, in other words, was already priced in. What is still not certain – and will likely have the greatest impact both on the UK economy and UK stocks – is who Burnham chooses to replace Rachel Reeves as chancellor.

“A week ago, when you looked at the prediction markets, Wes Streeting was the favourite,” said Rands. “Markets quite liked that.” But Ed Miliband appears to have become the more likely candidate in the meantime, and the markets are less keen on the prospect of him in number 11, according to Rands.

Whoever takes the role will be the primary person responsible for executing the precarious economic balancing act that Burnham will face – an unenviable task.

Why UK stocks offer diversification

The good news is that the UK stock market is not the same thing as the UK economy. The large cap stocks of the FTSE 100 are predominantly global companies who derive their revenue from all over the world – so they can perform strongly even if UK growth slows.

“A lot of people conflate UK equities with the UK economy,” said Rands, adding that it’s often more the mid- and small-cap end of the UK market (accounting for around 12% of its total value) that are heavily exposed to the domestic economy.

UK stocks also offer rich sources of diversification. Compare the top ten holdings of the S&P 500 and the FTSE 100:

*Based on weightings in the Vanguard S&P 500 UCITS ETF (LON:VUAG) and the Vanguard FTSE 100 UCITS ETF (LON:VUKG), which track the respective indices, as of 31 May.

Five of the S&P 500’s top ten holdings are designated as Information technology companies – with two of the other five being represented by Alphabet’s two different share classes. But given that all of the exceptions are members of the ‘Magnificent 7’ group of AI-relevant stocks, it’s fair to say that all of them are tech companies in a fundamental sense, if not according to their official designations.

The FTSE 100, meanwhile, has six different sectors included in its top ten companies, none of which include more than two companies.

“Global indices are predominantly US, which are predominantly tech,” said Rands. “In the UK, it’s spread across a number of different sectors.”

This month saw the Bank of Japan (BoJ) raise its main interest rate from 0.75% to 1% – the highest rate since 1995, in response to surging global energy prices due to the Iran war.

While Japan’s inflation rate has sat below its 2% target all year – it was 1.5% in May – a BoJ policy statement suggested a risk of it accelerating above that target, forcing businesses to pass on higher costs. This could lead to “an increase in consumer prices across a wide range of items”.

Widely expected by the market, the rate hike – decided by a vote of seven to one board members – was seen as a landmark step on Japan’s continued path towards ‘normal’ monetary policy, breaking out of a three-decade-long deflationary period.

Just one dissenter, dovish new recruit Toichiro Asada, voted to hold rates.

Economists and policymakers are described as ‘hawks’ or ‘doves’ depending on their approach to achieving economic stability. Hawks favour price stability and curbing inflation through tighter policy (rate hikes), while doves prefer economic growth and maximising employment through looser policy (rate cuts).

A summary of opinions from the bank’s two-day Monetary Policy Meeting (MPM) on 15-16 June was published by the BoJ last Wednesday (24 June). It doesn’t attribute quotes but cited one member as saying: “Raising the policy interest rate could suppress aggregate demand by curbing firms' business fixed investment, potentially inducing simultaneous declines in inflation and in production and employment. The Bank should therefore hold the rate steady at this point.”

Most of the opinions warned of mounting price pressures as businesses passed on the rising costs resulting from the weak yen and Middle East conflict.

What does the BoJ’s rate hike mean for Japan’s economy?

As Japan is an importer of natural resources, a weak yen pushes up the cost of imports for its domestic consumers and businesses, in turn fuelling higher inflation.

The yen is currently its weakest against the US dollar since 1986. Macrotrends data shows it was trading around 161.70 on 27 June, with traders braced for the possibility of further government intervention to prop up the currency.

Normally, if the BoJ hikes rates, the yen should get stronger. But according to Alex Hart, investment specialist at fund manager Sumitomo Mitsui DS Asset Management, that’s not happening right now because of the influence of the US.

He explains how people expected the US economy and job market to slow down, which would have led the Federal Reserve to cut rates. But economic revisions have held up – employment data was positive and inflation remains sticky – so a US rate hike may be expected instead.

Hart says this is weighing on the yen in terms of the attractiveness of the ‘carry trade’ (when investors borrow yen cheaply to invest in higher-yielding assets elsewhere).

“At the moment it’s probably more the US and global economy that are the determinants of the yen [as well as] real money demand,” he adds. Higher inflation is also encouraging Japanese consumers to buy more equities – selling yen and buying global assets. That creates additional downward price pressure on the yen.

That said, he doesn’t expect further yen depreciation because the government will likely intervene, which even if it doesn’t work it sends a message to hedge funds that might be looking to short the yen, for example.

Currency intervention is when a country’s authorities – in this case, the BoJ and Ministry of Finance – tap their huge reserves to sell US dollars and buy their domestic currency (yen), strengthening the local currency to help stabilise rising prices.

Many investors are waiting to see how all this affects liquidity, says Scott Gardner, investment strategist at investment platform J.P. Morgan Personal Investing.

A more ‘liquid’ market means consumers and businesses can spend, borrow and invest more easily, fuelling economic activity.

Where are the bright spots for investors in Japan?

Although the BoJ is slowly reducing its quantitative easing (QE) and bond-buying programme, Japanese banks are increasing lending and, in turn, their balance sheets.

“The commercial banks have been producing loads of liquidity, even more yen that has got to find its way into the market,” Gardner adds.

His team at the platform has been overweight Japan since the start of the year in its Fully Managed range, which is constructed using exchange-traded funds (ETFs).

“We like the Japanese economy and see overall economic activity improving, you’ve got the [aforementioned] liquidity picture and also a very pro-growth agenda coming from the Takaichi government,” he says.

Elsewhere, Hart says energy infrastructure-related stocks have performed well, while banks, consumer names and defence look promising.

“Some defence-related names have sold off quite considerably amid global expectations the war is ending. Also heavy aerospace, ships and tanks are being replaced by cheaper drones,” he says.

“But defence spending in Japan has increased to 2% of GDP – potentially moving higher than that. We’re seeing increased spending in other countries as well, also some of those names are now moving into drone technology, so that’s an area I think remains quite a bright spot in terms of its potential.”

Two of Japan’s biggest listed defence contractors are Mitsubishi Heavy Industries (TSE:7011) and Kawasaki Heavy Industries (TSE:7012). Both are listed on the TSE and investing in drone and unmanned aerial vehicle (UAV) technology.

Why invest in Japan?

The other exciting shift in Japan’s investment case, is its move away from a “sleepy giant of mainly industrials and financials” to a technology leader that’s holding its own alongside the rest of Asia.

“Semiconductors are the big thing at the moment, which plays into the index concentration dynamic you also see in the US. Around 21% of the Nikkei 225’s top 10 holdings are in semiconductors,” Gardner adds.

“The AI trade is in full swing across Asia; be it Taiwan, Japan, Korea… that's one of the reasons why the Nikkei has held up quite well relative to global market conditions.”

While most of the big tech beneficiaries are US-based, he sees the AI trade broadening because those further back in the supply chain who are actually responsible – “the picks and shovels”, as he describes them – are predominantly in Asia.

Hart also points to the tech theme; he says earnings growth is coming largely from data centres, with high levels of capex in electronic components.

Auto giant Toyota (TSE:7203) was Japan’s most valuable listed company by market capitalisation (market cap) for 20 years, holding the top position on the Tokyo Stock Exchange (TSE) before it was displaced by communications company SoftBank (TSE:9984) at the beginning of June.

Now in pole position on the TSE is computer memory manufacturer Kioxia Holdings (TSE:285A).

There is currently a ‘bottleneck’ in NAND flash memory (the type used in memory cards, USB sticks and SSD drives) and Hart says Kioxia (which spun out of Toshiba in 2018) is a pure play on that market.

How should you invest in Japan?

Investing passively in Japan right now is a big play on technology. For investors in index funds understanding the construction of the underlying index is crucial, especially if you’re looking at Japan to add diversification – you might end up doubling down on technology exposure.

The iShares Nikkei 225 UCITS ETF (LON:CNKY), which tracks its namesake index, has an approximately 40% weighting towards tech as of 26 June.

“The Nikkei 225 is share price constructed, which is one of the reasons why Advantest and Tokyo Electron are dominating the Nikkei. In the MSCI, they each make up less than 3%, so it’s a huge discrepancy,” Gardner points out.

It’s possible to invest directly in Japanese shares on some platforms, but this typically comes with restrictions, such as higher minimum investment amounts (Saxo) or having to give instructions over the phone (AJ Bell).

For more diversified exposure to the broader Japanese equity market, actively managed funds can cast their net wider.

Japan has around 4,000 listed companies, while even the TOPIX only has 1,500 names.

“Most of the inefficiency in terms of market pricing – given poor sell-side analyst coverage and so on – is potentially more exploitable with smaller and less-known companies, which active management can find,” says Hart.

Baillie Gifford Japanese is a growth-focused fund that invests in large and medium-sized companies with high and sustainable growth potential, while Man Japan CoreAlpha is another popular choice.

If you prefer closed-ended funds, some specialist investment trusts include J.P. Morgan Japanese Investment Trust (LSE:JFJ), Schroder Japan Trust (LSE:SJG) or AVI Japan Opportunity Trust (LSE:AJOT).

For broad Japanese index exposure, any of the major index fund providers likely have a Japanese equity offering at relatively lower cost, such as iShares Japan Equity Index or Vanguard Japan Stock Index.

Japan makes up around 5-6% of the global stock market (the second-largest regional exposure after the US), so indirect access via any number of global model portfolios or tracker funds will provide some exposure to the region.

We will find out soon whether Andy Burnham will face a contest for the leadership of the Labour Party or take office unopposed. Either way, it makes little difference now. One way or another, he is likely to be our next prime minister before the end of the summer.

There are some ways in which Andy Burnham will be an improvement on the outgoing Keir Starmer. He is a better communicator and more personable. As mayor of Manchester, he is untainted by the failures of the last two years and can make a fresh start. Perhaps best of all, he can get rid of the hapless Rachel Reeves as chancellor and replace her with someone less obviously out of their depth and with at least some grasp on how businesses operate and the challenges they face. Temporarily at least, this may start to lift Labour's dismal poll ratings.

There's a problem, however. Prime minister Burnham will be heading straight into a financial crisis. Britain's economic outlook keeps on getting worse and worse. At the end of last week, we learned that government borrowing in May came in way above forecast, with a 30% year-on-year rise. For the month, government spending was up by 7% year on year, while tax receipts, even with record increases, were up by just 4% (it is hard to see much sign of the “neoliberalism” Burnham complains about in those figures). Growth stagnated last month, despite all the extra spending the government has thrown at the economy. Unemployment is rising relentlessly, especially for young people, and the welfare bills are running out of control, with the number of working-age people on benefits above four million. All the warning signs for a crash are already flashing red.

Andy Burnham is only going to make things worse. It is hard to detect much in the way of a serious economic programme in the collection of soft-left soundbites that make up his standard stump speech. But insofar as he has one, it involves yet more borrowing and spending. He has promised to bring the utilities under greater state control but said nothing about how that would be paid for. He has promised to cut business rates for small companies and launch a massive programme of council-house building, without attaching any kind of a budget. And if Burnham has ever said anything about controlling public spending, especially the soaring welfare bill, he has kept it very quiet. Even if he only keeps a fraction of his spending promises, and it will be very hard to break all of them, then the deficit will keep climbing higher and higher.

Can Andy Burnham succeed as prime minister?

Even as the deficit rises, Andy Burnham has said almost nothing about how he intends to boost growth to pay for it all, nor has he made any attempt to bring business on board. Celebrity chef Tom Kerridge has backed him, but only because of his promise to reduce the rate of VAT on hospitality businesses to 10% (yet another unfunded promise). Other than that, Britain's major corporate leaders have remained silent. There is not going to be any wave of investment to welcome the new regime, nor is there likely to be any dramatic measures to encourage investment into the UK. In the background, Britain's financial position is steadily deteriorating. Very quickly, the markets are going to test the new government. Is it willing to cut welfare, or will it raise taxes to keep paying the £125 billion a year in interest on the national debt the country now has to pay? Traders will want to find out, and find out very quickly, and if the answer is no, then gilts will be sold off.

The last PM to take over from one who had been elected with a big majority was Liz Truss in 2022. We all know how that worked out – her lifespan in office was famously shorter than that of a lettuce. Burnham won't face quite the same set of challenges, nor is he likely to attempt anything as risky as the mini-budget that led to her unravelling. Even so, the British economy is in far worse condition than it was then, our debts are far higher and the bond markets already view us with suspicion. Andy Burnham will soon face the heat – and may well wilt as quickly as a lettuce.

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Jeremy Grantham is an expert in stock market bubbles. In the 1980s he spotted the Japanese bubble. He also, rightly, refused to rush into the tech bubble that popped dramatically during the dotcom crash.

Now, with all eyes on the astronomical valuations AI firms are commanding, does he think a bubble is emerging?

In the latest episode of MoneyWeek Talks, Grantham told MoneyWeek editor Andrew Van Sickle that historians a century from now will be writing about this moment in the same way they write about the South Sea Bubble, one of the first and most significant financial crashes in history.

Grantham points to SpaceX. He said: “The SpaceX prospectus is actually unbelievable. Mining asteroids and colonies on Mars and moving through space and a projection of revenue streams, 90% of which seem to relate to AI.

“And it’s not clear that their version of AI, which is at the moment having its bottom kicked around the block by Anthropic and the rest of the boys is going to be even around. Forget 90% of this colossal income stream of the biggest enterprise in the history of man.

“And of course, they’re running at huge losses at the moment. What an act of faith, I mean, give me a break. Talk about tulips.”

That is not to say that Grantham is opposed to the transformative nature of AI, though. He sees that it is impressive. However, he is cautious about the state of the industry at the moment.

He cited the example of the railroad boom, which he sees as a similar crucial technological advancement that hugely boosted productivity. But the market crashed still.

“People don’t realise that the more obvious and important the idea, the more likely you are to attract too much capital and have a market bust.”

“The railroads transformed our lives. They added enormous productivity. And yet they were so obviously going to do that, that everyone built too many railroads, and everyone lost their money. That will happen in AI.”

He added that looking at the history of the Magnificent Seven and comparing it to their future plans shows two different worlds.

“Looking back, you have seven monopolies. Amazon dominates retail sales, Tesla gets a leap ahead in EVs and so on. They each killed off their junior competitors, bought the exciting up-and-coming competitors, and bestrode the world.”

But the future looks drastically different. Instead of seven monopolies, there is one ultimate goal that they are all aiming for – alongside other firms snapping at their heels. That goal is artificial intelligence.

Grantham says the firms believe that whoever gets there first will have a license to make more money than anyone has ever made at anything in history.

“They’re all saying the main risk is not spending enough. ‘We will spend our vast cashflows’, ‘my 200 billion is bigger than your 107 billion’ – it’s like a kind of gorilla fest in that sense and they all pile into the ring to fight to the death.

“There can only be one. They’re going to fight until someone survives. Now, if you think this is like the seven distinct monopolies, you’re crazy.

“This could be the most vicious fight to the end that we have ever seen, starting now. And there are plenty of signs of it already. In that sort of fight, they do not make lots of money and the stocks get crushed. And then they emerge from the wreckage, like the internet.

“The railroads rose from the ashes, and this will rise from the ashes.”

Listen to MoneyWeek Talks for our full interview with Jeremy Grantham. You can watch the podcast on YouTube, or listen to it wherever you get your podcasts.

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.

There’s an age-old investment adage that promotes the value of spending time in the market as opposed to trying to time the market.

Unless you’ve got a crystal ball that tells you exactly when certain markets or asset classes are going to rise or fall, you’re probably better off investing smaller amounts on a regular basis, referred to as pound cost averaging. This smooths out any highs and lows, allows you to pay less for your investments on average and can make the journey less volatile, if indeed that’s your desired experience – some investors may enjoy the thrill of trying to time market highs and lows with a lump sum.

Behavioural finance experts often suggest that as humans, we’re predisposed to certain biases, including selling our investments when performance starts to drop off, despite all the expert evidence telling us not to do that; it just crystallises any losses instead of giving your investments a chance to recover.

That said, investor confidence is at its highest in seven years despite a year defined by geopolitical instability, global trade tensions and market uncertainty.

An annual study of investor behaviour and sentiment from research and communications businesses AML Group and The Nursery Research & Planning, The Investor Index 2026, showed investor confidence reaching a new high.

The index – a composite measure of investors’ confidence, sense of control and how informed they feel about their financial decisions – is back well above pre-pandemic levels, surpassing the previous high of the AI boom in 2024.

“What’s particularly interesting is how normalised uncertainty appears to have become for investors,” said Nicola Wright, insights director at The Nursery Research & Planning.

“Confidence is no longer closely tied to calm market conditions. Investors seem increasingly comfortable making decisions in a world where disruption and volatility are seen as part of the backdrop rather than temporary events.”

Several reasons are likely feeding that confidence, according to Jason Hollands, managing director at investment platform Bestinvest.

These include overplayed concerns that the US was facing a recession (which has not materialised) and markets (being forward-looking) appearing to discount the risk of the Middle East conflict as temporary, despite it lasting longer than many had first expected. He believes the over-riding reason behind many investors’ optimism is around AI and the exceptional levels of capital expenditure being ploughed into the sector.

Investing during uncertain times

Confidence is informed by several factors, including attitude to risk, life stage and level of experience and the amount of money you have.

The survey found 84% of investors (defined as having £10,000 or more invested) near or in retirement feel confident their savings and investments will be sufficient. Confidence is also higher among those already retired, as opposed to those in planning stages, and among those with more than £250,000 invested.

While the index showed UK investors were putting their money where their mouths were – 50% increased their investment amounts compared with last year while 40% maintained the same levels despite an uncertain backdrop.

That faith in the market is supported by a willingness to pay a premium for more likelihood of returns, a priority alongside decent track records and user-friendly products.

The choices UK investors are making also indicate optimism, favouring equity funds on the whole, with a rising demand for exchange-traded funds (ETFs). In keeping with regular savings strategies, considering a diversified, long-term approach – such as looking at reliable large caps, high-quality fixed income and some uncorrelated real asset exposure – should help many investors, whatever their time horizon, weather any storms.

Hollands said the danger of buoyant markets is the risk of overconfidence or being swayed by casual conversations with people ‘down the pub’.

“A lot of DIY investors start off enthusiastically but over time their interest wanes and they tend to forget about their portfolio,” he said.

Asset allocation – checking if any position sizes need rebalancing to bring the overall investments in line with your intended risk profile and preferences – is something many self-directed investors tend to overlook. Many get excited about fund or stock ideas rather than looking at the bigger picture, he added.

“Try not to over-react to the last thing someone told you but also make sure you’re reviewing your portfolio at least a couple of times a year, at the same cadence. Having a well thought-through asset allocation is really important, which can then anchor you to making better decisions.”

Are you thinking about investing but not convinced yet?

Intenders, perhaps unsurprisingly, are more cautious. The Nursery and AML define this cohort as those with over £10,000 in savings or over £2,000 in savings and an income over £40,000 but also likely to invest in the next two years. These people are keen to invest but still waiting for a ‘trigger’ event.

Tending to listen to banks, family and friends rather than professional advisers, they are more anxious across the board compared to investors. They see property and savings as safer bets than stocks and shares, with fear of loss and risk aversion their main barriers to getting started.

Of this group, 41% worry they will lose money and 37% say it feels too risky. Yet 44% say low-risk options or better knowledge would get them over the line.

“One of the main reasons that a lot of people who’d like to invest don’t do it is they’re nervous about putting their money in at the wrong time, and then suddenly seeing a significant drawdown in the value of their investment. That can stop them investing full stop,” explained Hollands.

He said the way to overcome that was to take the pound cost averaging approach.

“By just investing a little often regularly, it takes the emotion out of it and also means that across a year, you can expect to smooth out some of the ups and downs that you see in the short term.”

He also urges even experienced investors to consider the benefits of this approach – it’s not just for beginners.

How to start investing during uncertain times

Bestinvest is seeing novice investors increasingly choose readymade portfolios rather than trying to build their own from scratch, selecting funds themselves.

Readymade portfolios are essentially multi-asset funds designed to cater to a range of risk profiles, which have become common across most DIY investment platforms, which have evolved their offerings to serve customers of all levels of experience.

“Readymade portfolios provide inexperienced investors with effectively a ‘one-stop shop’ managed investment solution, through a diversified selection of underlying funds selected by a portfolio manager and an asset allocation approach that is periodically rebalanced to stay in line with the risk profile,” said Hollands.

He also said that passive funds had become more popular, with novice investors increasingly putting relatively small amounts via regular savings into global tracker funds.

The emerging market (EM) universe is very diverse in terms of what drives individual economies. What does China have in common with India (other than being populous and in Asia) or either of them with Brazil? Yet they are treated as a block, and recent trends are stretching these contradictions further than ever.

A top-down investing strategy often involves assigning things to groups, then buying the most compelling groups or choosing the most attractive within a group. These groups can seem arbitrary – the difference between members can be as big as the similarities. Yet in the investment business, classifications that seem easy to understand can stick around well past the point where they make sense.

Standard rules of thumb for emerging markets would tell you that the last few months have been difficult. Many emerging markets are energy importers, so will suffer from higher oil prices. Markets also tend to be affected by inflows and outflows from foreign investors. If global investors get more nervous, they would be expected to cut emerging-market exposure first and take their money home. Yet the MSCI Emerging Markets index is up by 20% in sterling so far this year. How?

AI stocks are over-represented in emerging markets indices

The explanation hinges on two points. The first is that two of the biggest markets in the index are emerging markets only in one very specific sense. South Korea and Taiwan retain certain restrictions, mostly around their currencies, that MSCI deems incompatible with being in the developed markets group. Yet in many respects, they are both wealthier and more advanced than many developed economies.

The second is that a few huge companies – Taiwan Semiconductor (TSMC), Samsung Electronics, SK Hynix – are huge beneficiaries of the AI boom and are driving their markets even more than the Magnificent Seven drives the US market. Those three stocks account for almost 30% of the MSCI Emerging Markets index. Taiwan and Korea together make up 50% of the index. In turn, TSMC is 55% of the MSCI Taiwan, while Samsung Electronics and SK Hynix account for 60% of the MSCI Korea.

These are eyebrow-raising numbers. They have worked out very well for any broad emerging-market investor. Still, we must remember that if the AI boom ends and the US market slumps, the emerging market index will do the same – it's been a play on the same theme.

If you want diversification, you will only find it in funds whose mandate does not bring in these stocks – BlackRock Frontiers (LSE: BRFI) or Barings Emerging EMEA Opportunities (LSE: BEMO), for example. Of course, these funds have lagged in recent months, held back by the lack of tech exposure or battered by the Middle East crisis. I would not say it is yet time to rotate out of broader emerging market funds. But it is something to keep in mind if the crisis passes and the AI boom falters.

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.

OpenAI, the company behind ChatGPT, has joined the race between the three tech giants set to list in 2026, each tipped for a landmark initial public offering (IPO).

One week after Anthropic filed its own paperwork to the US regulator, the Securities and Exchange Commission (SEC), and in the same week as SpaceX is expected to float, OpenAI kicked off its own IPO process.

In a brief post on its website on Monday 8 June, OpenAI said: “We recently submitted a confidential S-1. We expect it to leak so we’re just announcing it. We have not decided on timing yet; it may be a while because there are things we want to do that are likely easier as a private company. But it’s a complicated set of tradeoffs and this gives us the option to go public sooner if that ends up being best.”

Filing a ‘confidential’ S-1 form means the SEC can review a company’s financials before having to make them publicly available, which can mitigate the level of market speculation ahead of an IPO.

How much is OpenAI worth?

At the end of March, OpenAI closed its latest funding round, with $122 billion of committed capital co-led by SoftBank, which – post-money – values the AI company at around $852 billion. Dwarfed by the $1.75 trillion SpaceX is said to be valued at, OpenAI ranks behind Anthropic’s latest valuation of $965 billion.

It said it was generating $2 billion in monthly revenue, a growth rate it claims is four times faster than “the companies who defined the internet and mobile eras, including Alphabet and Meta”.

At the time, the company also extended its availability to bank channels in a bid to attract investment from individual investors, which include via several exchange-traded funds (ETFs) from ARK Invest, which own the stock.

OpenAI’s democratic third phase

Alongside confirmation of its S-1 filing, OpenAI said it was entering its third phase.

Having spearheaded the consumer-facing AI boom when it launched ChatGPT in 2022, as of February it had around 900 million weekly active users and more than 50 million paying subscribers.

OpenAI has set out its three main goals: to build an automated AI researcher; accelerate the economy; and give everyone on earth an artificial general intelligence (AGI).

A blog by CEO Sam Altman and chief scientist Jakub Pachocki dated 8 June said its first phase had been about doing research toward AGI, its second began "when our research became relevant to the real world and we became a product company."

"Now we are entering the third phase. The economy is beginning to reshape around AI. The central question now is how to make advanced AI abundant, affordable, safe, useful and easy enough for every person and organisation to benefit from it."

In the article, they said rather than concentrating AI’s power in too few hands, which history shows creates fragility, the future needs a broad distribution of that power, which makes societies more "resilient, adaptable and free".

"That is why access matters. It is also why safety, privacy, affordability, open ecosystems, and public oversight matter," they said.

In Asia, it is the best of times, it is the worst of times. The crisis in the Strait of Hormuz is hammering energy importers hard, even as parts of the region emerge as the principal winners of the mania surrounding AI. That pushed the MSCI Emerging Markets Asia index up 15% in the first five months of the year.

Yet on currency markets things are grim. Talk is turning to the 1997 Asian financial crisis, when large trade deficits caused investor confidence to “evaporate within months”, triggering “deep recessions” and political tumult, say Swati Pandey and Claire Jiao on Bloomberg. Indonesia, the Philippines and India look especially vulnerable to capital outflows. Respectively, their currencies have shed 8.5%, 9.5% and 10.5% against the US dollar over the past 12 months.

The once-promising Philippines has been hit especially hard, says Daniel Moss, also on Bloomberg. The country was a Southeast Asian growth star in the 2010s. Now inflation is running at 7% and heading for double digits, a huge surge from 2% in January. The local PSEi share index is down 5.6% over the past three months. The Philippines' difficulties could be a taste of things to come elsewhere.

But nowhere are Asia's contradictions as stark as in South Korea. The won is trading at its lowest level against the dollar since the 2008 financial crisis, say William Sandlund and Daniel Tudor in the Financial Times. Yet puzzlingly, Korea is enjoying a record trade surplus because of insatiable demand for its computer chips. An export boom should be strengthening the won, not weakening it.

Paradoxically, one explanation may be the blistering pace of an Asian stock market boom. The Kospi index has doubled since the start of the year, driven by large runs at chip specialists Samsung and SK Hynix. That has forced fund managers to sell to avoid overexposure, with foreign investors offloading a record net $79 billion of local equities this year.

Taiwan's Taiex index has gained 58% this year, seeing it surpass India to become the world's fifth-largest stock market. Almost all of the world's high-end chips are made by Taiwan's TSMC. The island, which is only slightly larger than Belgium, now accounts for almost a quarter of the entire MSCI Emerging Markets index.

Investors in Asia should ‘buy the shovels’

When there's a gold rush, it's good if 30% of your economy is “based on shovel manufacturing”, says Joseph on Substack. Taiwanese GDP rose at an annualised pace of 23.6% in the final quarter of 2025. GDP has risen by almost a quarter since ChatGPT was launched in late 2022. Not everyone is benefiting from the boom – exporters are doing well while everybody else struggles. But there is no arguing with this modern growth “miracle”.

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Confidence in stock markets appears to be coming back as investors move out of defensive assets like money market funds in favour of equities, particularly those listed in the US, according to latest industry data.

Figures from trade body the Investment Association (IA) showed higher monthly inflows in April, rising to £1.5 billion, an increase on March’s figure of £1.3 billion.

Equity outflows reduced significantly over the month as global stocks rebounded, reflecting higher risk appetite and the ability to look past ongoing geopolitical uncertainty.

The MSCI World Index returned 9.6% in April (in US dollar terms), its strongest monthly gain since 2020.

Equity funds reported outflows of £1.3 billion in March while April’s outflows were roughly half that, at £689 million.

Investors favoured equity index trackers over their actively managed equity fund peers, with £1.7 billion inflows compared with outflows from £2.4 billion, respectively.

Should I invest in US equities?

At sector level, North American equities led the charge, attracting £860 million – their highest monthly amount since April 2025.

Miranda Seath, director, market insight and fund sectors at the IA, said the big question was whether this momentum broadens out, or if geopolitical uncertainty keeps risk appetite fairly contained.

The trade body suggested strong earnings from several big tech names in recent weeks – Alphabet (NASDAQ: GOOGL), Meta (NASDAQ: META), Amazon (NASDAQ: AMZN) and Nvidia (NASDAQ: NVDA) all exceeded expectations, supported by continued investment in artificial intelligence (AI) likely contributed to higher demand.

This trend was underlined by £96 million of inflows into the IA Technology and Technology Innovation sector – its first in seven months.

It’s not just tech: 84% of the 485 S&P 500 companies that reported Q1 earnings beat analyst estimates, according to Bloomberg.

In contrast, regional equity fund sectors from UK, global emerging markets, Asia and Europe all reported net outflows, losing £673 million, £477 million, £399 million and £244 million, respectively.

Investing through volatile times

Money market funds – often used as a temporary shelter for investors when markets look uncertain – posted their first outflow since August 2025, with £755 million moving away from these more conservative strategies.There were record inflows to money market funds in the previous month.

Short-term Money Market was the worst-selling sector in April.

Seath said this was particularly striking. “For much of the past year, investors have been holding capital in short-term cash-like assets, understandably so, given the level of uncertainty in markets.

“The fact that we are now seeing that money begin to move is an encouraging sign that investors are starting to feel more confident in the investment outlook, particularly for the US following a strong month of North American equity inflows.

Similarly, the IA Targeted Absolute Return sector also witnessed outflows of £114 million, reversing three consecutive months of inflows.

Bond funds also returned to inflows of £466 million, with Mixed Bond the best-selling fixed income sector at £373 million, followed by Sterling Corporate Bond’s £85 million and Sterling High Yield, which had slightly lower inflows of £79 million. UK Gilts took in £67 million while Government Bonds had further outflows, with £147 million redeemed in April.

UK investors looking for income often concentrate on FTSE 100 companies. But it's not just the more defensive, established giants that can deliver attractive dividend yields; mid-sized and smaller companies can too. These smaller businesses tend to be more cyclical and faster growing, helping to drive earnings and dividend growth, which can boost total returns over time. “Time” is the word to emphasise there. Sometimes you have to wait for them to fulfil their exciting capital-growth potential. But if you've targeted good, well-managed companies paying out dividends, you know you're being paid to wait. This area of the market can go through difficult patches, but that can open up opportunities to buy at attractive prices and enhance the dividend rewards further.

It's in one of those difficult patches now. Smaller companies have substantially underperformed their large-cap peers. In my view, this is because smaller companies are more domestic in their exposure at a time when the UK economy is roughly flatlining. And they're more cyclical at a time when there are question marks about the global and UK economies. But this prolonged underperformance has arguably thrown up some interesting value opportunities. Here are three holdings within our multi-cap, income-focused Lowland Investment Company that we think illustrate the potential benefits for long-term investors willing to hunt among smaller companies, as well as larger ones, for dividend yield and potential capital growth.

Three UK smaller companies to consider

Marshalls (LSE: MSLH) makes building products such as paving stones and roofing materials. It's trading on less than ten times forecast earnings, on an earnings number that is depressed compared with its history. End markets, particularly in landscaping products, are challenged, but while you wait for things to pick up there is a dividend yield that is more than 5% and roughly twice covered by earnings. There are also divisions within the group that are more resilient. Its solar panels division, for example, has grown sales strongly in recent years.

Shaftesbury Capital (LSE: SHC) owns much of London's West End, including Covent Garden, Carnaby Street and Chinatown – a mix of retail, office and residential properties. It's trading on a roughly 40% discount to net asset value. The market is gloomy about property, but vacancy rates in this portfolio are very low. The dividend yield is more than 3% and the managers are targeting rental growth of 5%-7% a year. This should mean the company has the potential to grow that dividend sustainably to offset inflation.

Hilton Food Group (LSE: HFG) is a meat packer with customers globally, such as Tesco in the UK and Woolworths in Australia. It has struggled in recent years after expanding into adjacent areas, such as white fish and vegetarian food. But the current CEO seems to be shifting focus back to its core skills. The shares trade on a price-earnings ratio in the low teens and a dividend yield covered by earnings of more than 6%. Hilton is now investing in new growth opportunities. It's starting to work with Walmart in Canada, a venture that might eventually spin out to other countries covered by the supermarket chain. If people can feel confident the problems have been dealt with, they may get more excited about growth opportunities again.

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Japanese shares hit a new all-time high earlier this month, with the Nikkei 225 index up 15% this year, outperforming the Topix index, which is up 9%. The performance gap between the two indices has spiked to the highest level in records going back to 1970, says Leo Lewis in the Financial Times. The Topix, which is weighted by market capitalisation, gives a more accurate picture of the broad health of the Japanese market.

The Nikkei 225, while more famous, is less accurate as it is weighted by price and tracks only the large-cap stocks. The latter's outperformance reflects strong buying enthusiasm from foreign investors for a handful of large-cap technology firms such as SoftBank, Tokyo Electron and Advantest.

While the technology names overheat, there is reason for optimism about the broader market. Corporate profits are picking up as the country exits years of “economic stagnation”, says a note from Asset Management One International. Pro-shareholder reforms are raising capital efficiency. Over the past 15 years, average return on equity for Japanese shares has been 8.14%, but that is on course to rise to 10.5% this year.

There is more juice to be squeezed yet from corporate reforms. On a price-to-book ratio of 1.77, Japanese shares still trade at a notable discount to the 2.32 level of their UK counterparts, not to mention the 5.14 level of US shares.

Japanese shares surge but bonds rise too

Prime minister Sanae Takaichi won a landslide victory in February on populist spending promises. This week, it was reported that Takaichi's government is preparing a supplemental budget to pay for rising costs caused by the blockage of the Strait of Hormuz – Tokyo is heavily subsidising petrol prices.

Heavier Japanese government borrowing increases competition for the limited global supply of loanable funds. Japan has historically been a major exporter of capital through the carry trade. Now those funds are being pulled back home, depriving other finance ministries of a key source of demand for bonds. Japan's ten-year bond yield has hit its highest level since 1996.

At around 206% of GDP in 2024, Japan's gross public debt is the highest in the developed world, says Shigesaburo Okumura for Nikkei Asia. The OECD think tank's latest survey of Japan criticised its “populist fiscal management”. The report notes that, at 10%, Japan's sales tax is low and could be raised to help balance the books. But Takaichi says cutting the tax is a “long-cherished wish” – a wish thwarted by the country's supermarket payment systems, which aren't set up to charge the 0% rate on food she desires.

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By European stock market standards, the size of the SpaceX initial public offering (IPO) will be breathtaking. The company is expected to be valued at between $1.75 trillion and $2 trillion, and given how frothy Wall Street is right now, it would hardly be a surprise if it went to a substantial premium on its first few days of trading. We can all question the valuation. The Starlink business that now provides internet access on flights is a clear money-spinner and it may be able to break into domestic broadband as well, but the plans for a colony on Mars look, to put it politely, a little optimistic. Even so, this is a huge business and a very successful one, and it has created a huge amount of value in a very short period of time.

It is far from alone. Anthropic, the company behind Claude AI, is reported to be planning an IPO in October, with a valuation of $1 trillion or perhaps more. Its rival OpenAI, the company behind ChatGPT, is also expected to list later this year, with a value of close to $1 trillion. There are slightly smaller companies just behind it. Last week, Cerebras, which makes AI chips, made its debut on Nasdaq, and after a first-day premium, saw its value soar to $95 billion. On the US market, incredible amounts of wealth are being created at dizzying speed. Anthropic is only five years old, OpenAI is ten (its profit-making unit only five) and although SpaceX was founded in 2002, it only really got going a decade ago.

The contrast with European stock markets is painful. SpaceX by itself will be worth almost as much as the whole of France's CAC-40 (valued at €2.6 trillion and falling rapidly as the value of LVMH slumps). It will be getting close to the entire value of Britain's FTSE 100, currently valued at £2.4 trillion, and SpaceX and Anthropic combined will certainly be worth more than all of the UK's 100 largest companies put together.

European stock markets need more mavericks like Elon Musk

The reason is clear. Very few new firms are being created. If you exclude mergers, the newest company on the CAC-40 is Eurofins Scientific, which was formed in 1987. Even where there are new companies, the best ones choose to list on Wall Street – the Cambridge-based chip designer ARM, for example, is now worth $220 billion, which would rank it as the third largest in the FTSE 100 if it had decided to list here.

Europe, including the UK, needs to realise how far behind it has fallen and start working out how to turn that around. First, it should radically reduce the taxes on start-ups to encourage more entrepreneurs. Britain has scaled back the break on capital-gains tax that anyone who started a new company used to benefit from, and most of Europe never had any concessions to start with. Instead, there is a constant stream of new wealth taxes and capital-gains taxes, with the Netherlands extraordinarily planning to tax capital gains before they have even been cashed in. No wonder there are far fewer start-ups and hence fewer giants ever emerge.

European stock markets should also roll back restrictions on growth industries such as AI and space. While the US has a booming space industry, Europe has a Space Act; while huge new AI businesses are created on the other side of the Atlantic, Europe is stuck with an AI Act. But there is no point in having a regulator if there isn't an industry to make rules for. There is still little sign that politicians in either Brussels or London realise how much damage has been done by trying to regulate industries before they have even begun.

Finally, Europe should relax the listing rule for entrepreneurs such as Elon Musk who want to keep control of companies. SpaceX will come in for a lot of criticism for allowing Musk so much control over the business and the $1 trillion pay package if he manages to create a thriving human colony on Mars. It doesn't follow Europe's governance rules. But so what? Entrepreneurs are often a little odd, and they are often control freaks, but they also have the drive and ambition to create huge new businesses. Europe could use fewer rules and more mavericks if it is to avoid turning into an investment backwater, with nothing more than a dull collection of very old companies.

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“Are markets just plain wrong to keep looking through the Iran war?” ran the title of the 17 April Merryn Talks Money Bloomberg podcast as markets hit all-time highs. The answer, as was made clear, is almost certainly not. “If you think the market is wrong, it's probably not the market, it's you,” as John Stepek said on the show. Geopolitics famously does not affect markets that much, yet every time there is a disruptive geopolitical event, it is followed by an endless stream of experts claiming that a disaster for investors is inevitable.

Rarely have the experts been as wrong as this time around. From top to bottom in late March, both the S&P 500 and the FTSE 100 fell 9% before bouncing all the way back up again and more in the next three weeks. The pundits predicted the oil price would rise to $150 or $200 a barrel and that there would be a consequent surge in inflation, pushing up interest rates and leading to a recession. This would hit corporate earnings hard and stock markets would spiral downwards. The only safe haven was gold.

Instead, the oil price has struggled to get past $100, gold has fallen about 12% since the start of March, bond yields (except in the UK) have retreated, inflation has ticked only modestly higher and there is no sign of a recession, although interest rates will probably go up, especially in the UK. Anyone who listened to the pundits and took action to “reduce risk” will have lost money. It gets worse. The US market has not stumbled, as confidently expected, but surged ahead, led by the much-maligned “magnificent seven” mega-caps. The AI “bubble” has not burst; it is the potential victims of AI in the software and data-provider sectors that have suffered. Earnings forecasts have continued to rise. The predictions of inevitable disaster were heavily influenced by historic parallels that, on closer inspection, turned out to be false.

The market holds little solace for doomsters

What lessons should be learned for the future? Further disruptive geopolitical crises are inevitable and when they happen, the “end of the world is nigh” crowd will be out in force, hogging the media's attention with their dire warnings of looming disaster and explanations of why markets are being totally complacent. The pessimists are already scanning the horizon for the next crisis to upset markets. With the tide having turned against Russia in Ukraine, that war is unlikely to provide solace for doomsters. If Ukraine's missiles can knock out oil facilities on the Baltic coast, they can surely destroy the Kremlin if Ukraine wishes to. A Chinese invasion of Taiwan has long been predicted by the prophets of doom, but that remains a highly risky venture for a country whose last military adventure, the invasion of Vietnam in support of the Khmer Rouge in Cambodia, was more than 50 years ago and was a disaster. Besides, modern drone technology makes a seaborne invasion even more risky than before.

Doubtless, some new reason to worry about geopolitical events will be found, but the key question is not what such events portend for markets, but what the market reaction tells us about the importance of such events. Nine times out of ten, as with this time, the market's reaction is right and the doomsters are wrong. Still, the parable of the boy who cried “wolf” teaches us that the time may come when those who cry wolf are, at last, right. It is nearly 20 years since stocks suffered a sustained bear market, as opposed to a short-term fall that was soon recovered. The US market is expensive and dependent on a pace of earnings growth that might not be sustainable. The UK and European markets are no longer cheap, just reasonably valued with limited prospects for earnings growth given sluggish or non-existent economic growth. Asian markets have advanced a long way in a short period of time.

“Buy on the sound of cannons, sell on the sound of trumpets,” Nathan Rothschild advised some 200 years ago. For now, taking some profits is starting to look like a better strategy than charging in, but it still looks as though markets will continue to make positive returns in the rest of the year. As US strategist Ed Yardeni reminds us, “earnings growth and economic expansion drive markets, not geopolitical shocks”. Earnings expectations continue to rise, with S&P 500 forecast earnings per share for the next 12 months at $344.30 and expected to reach $380 by year end. That puts the index on a forward multiple of 20.8, falling to 18.8 by year end. For the mid- and small caps, the forward multiple is around 16; for the “magnificent seven”, it is close to 27.

That sounds demanding, but, Yardeni notes, the information-technology sector, up 8% in the year to date, has benefited from a 33% rise in forecast revenue and 55% in forecast earnings in the last 12 months. The semiconductors sub-sector accounts for 42% of the sector, up from 15% a decade ago, and accounts for 47% of expected earnings. With expected earnings soaring, its prospective multiple is actually at a small discount to the S&P 500. Meanwhile, the application-software subsector has seen its multiple more than halve since 2021 to 23.4, the lowest reading since 2014, due to fears that AI will eat into its markets. Despite the $5 trillion valuation of Nvidia, this suggests that the exuberance of last year has given way to a more sober assessment, finding losers as well as winners.

The information-technology sector accounts for 28% of the S&P 500, but three of the magnificent seven, Amazon, Meta and Tesla, are not in it. Including all AI-related shares, technology accounts for 45% of the index and has doubled in three years. Liam Halligan of The Telegraph worries that this is unsustainable, just as the energy share of more than 25% was in 1980 (now 3%), or the more than 60% share of railways was in 1900. That is likely to be true, but doesn't prove that the US market is overvalued; rather, that its sector composition will continue to change over time. Meanwhile, UK and European pundits can only look on in envy; their markets are significantly cheaper, but their dependence on imported energy and their meagre exposure to technology means lower growth in revenue and earnings and a significant valuation discount.

Halligan is on firmer ground pointing out that the cyclically adjusted price/earnings (Cape) ratio for the US market is at an all-time high. This has been an unreliable indicator in the long term, owing to changing accounting rules, rates of corporation tax and its backwards-looking nature. It calculates the ten-year rolling average of corporate earnings in an effort to even out the ups and downs of the economic and earnings cycle. In recessions, earnings drop sharply, bringing down the Cape, so what the current level tells us is that there hasn't been an economic recession for well over ten years, merely short-term dips.

Stay invested, but be wary

No recession is visible, but they never are and when one comes, corporate earnings will fall. In addition, bear markets always expose overoptimistic accounting, weak finances and less than resilient business models. The best protection against this is a moderately valued market providing a cushion against earnings disappointments. A multiple of earnings above 20 and a ten-year US Treasury yield approaching 4.5% do not provide that, so investors are skating on fairly thin ice. Global diversification may not help; other markets may be better value, but have less earnings growth. Emerging markets are performing well, but are heavily dependent on the technology super-stocks of the Far East. If the US market falters, it is hard to imagine other markets carrying on regardless.

There is no need to panic, but investors need to be wary. If markets flatline for the rest of the year, re-establishing value, they can relax about 2027. If they continue upwards, 2027 could bring trouble, even if peace returns to the Middle East and Ukraine, oil prices fall and the political outlook improves.

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UK small caps have been left under-owned by investors' preferences for large-cap stocks in recent times, creating a significant valuation gap. However, as macroeconomic pressures stabilise and confidence returns, this gap is beginning to narrow. The strength of many UK small caps is becoming apparent. They are often more agile than their larger peers, operate in attractive niche markets and remain significantly under-researched – creating a fertile hunting ground for mispriced opportunities. We hold a concentrated portfolio of high-quality UK small caps, and take meaningful stakes and engage directly with management teams. This allows us to support long-term value creation and tune out short-term market noise. Across the portfolio, we are seeing a growing number of smaller companies reaching clear inflection points, yet share prices remain anchored to outdated narratives.

Three UK small caps to consider for your portfolio

The UK wealth-management sector continues to benefit from strong long-term structural tailwinds such as rising levels of household wealth and supportive government policies. Brooks Macdonald (LSE: BRK) looks like an interesting recovery story in that sector. The firm's recent transformation and investment initiatives are beginning to show results. This is complemented by rising momentum across its model portfolio service, which now represents 40% of assets and is growing at double digits. The company has recently returned to overall net asset growth, having now delivered two successive quarters of positive net flows. If sustained, this will show that management's efforts are paying off and could act as a catalyst for a substantial rerating. The firm could also become a takeover target. It is a valuable asset as a standalone platform, or in combination with another player.

Netcall (Aim: NET) also looks compelling. It is a leader in software related to customer engagement and business process automation, and the group serves industries including healthcare, local government and financial services. Its move to offering products from the cloud has transformed the business and accelerated top-line growth to double digits. It remains profitable and has a strong balance sheet. The investment case is being strengthened by AI. Netcall helps public-sector clients implement AI as part of broader efforts to automate services. Many of the relevant bodies lack in-house IT capabilities and therefore require a trusted partner to help them extract efficiency gains from new technology. This is where Netcall comes in, and its business strategy aligns directly with central government's push to digitise public services. The shares have fallen recently, caught up in the “SaaSpocalypse” narrative that AI will make many software providers obsolete. We think this misreads the situation. Netcall isn't being disrupted by AI – it is helping to deliver it.

Everplay (LSE: EVPL) is a developer and publisher of video games. Its model of acquiring and developing games made by independent producers limits the risks around development and improves the quality of earnings – 75%-90% of annual revenue is typically generated from a back catalogue of hundreds of titles, providing diversification and resilience. Recent weakness in the share price reflects concerns about AI's impact on the development of gaming. But Everplay's strength lies in identifying and acquiring successful intellectual property and managing it over time. If AI enables developers to create more content quickly and cheaply, this will increase the volume and make curation and selection even more valuable. Recent management changes support the investment case. We believe Everplay is a well-positioned, scaled player in a fragmented industry, with potential to consolidate further or eventually become an acquisition target.

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Several stock market index providers are re-evaluating their requirements to potentially fast-track newly listed megacap companies for inclusion on their major benchmarks.

Funds that track an index are obliged to buy all its holdings, although many providers have had a long ‘seasoning’ period in place – a time lag between a company’s Initial Public Offering (IPO) and it being included in a benchmark index that have typically ranged between three and 12 months.

Historically such rules have allowed companies to ‘settle in’, give the market time to digest and assess what they are worth. They also allow company management to adapt to the closer scrutiny that comes with being publicly traded as opposed to privately owned.

These are the kind of measures on which active fund managers will assess companies soon after listing; is the management team coping, have they seen sufficient evidence of growth or do they need to wait longer?

While such criteria might come into active managers’ decision-making, passive funds don’t have the same discretion. If a company joins the S&P 500, any tracker funds replicating the index automatically have to buy its shares.

One rule under review is about this listing time. If proposed changes go ahead, companies set for IPO will be included in tracker funds much sooner, raising questions over whether passive investors are being exposed to more risk, inadvertently.

What changes are being proposed to index inclusion rules?

This month, Nasdaq introduced fast-entry rules allowing megacap stocks to be included in the Nasdaq-100 index of non-financial US-listed stocks after just 15 trading days, as opposed to a year under the previous rules. Updates have also included higher minimum value thresholds, higher liquidity requirements and stronger investor protection.

FTSE Russell, the provider of the Russell 3000, has also consulted on its listing rules for its Russell US Equity Indexes but is yet to publish its outcome.

It is focused on three main areas: fast entry for sizeable IPOs – as short a period as five days rather than waiting for the next annual update; a 5% minimum free-float rule (referring to the percentage of shares available for public investors to buy and sell); and a 5% minimum voting rights rule (meaning public shareholders must collectively have at least 5% of the company’s voting power).

S&P Dow Jones Indices (S&P DJI) – the provider of the US flagship index, the S&P 500 – is currently holding an industry consultation to gather feedback on eligibility rules for megacap companies. It’s also mooting a shorter seasoning period, reducing it from 12 to six months.

It currently defines megacaps as those with market valuations falling in the top 100 constituent companies, although this is also up for review.

In its consultation paper, S&P DJI said: “The proposed criteria exceptions and changes to the S&P 500, S&P MidCap 400 and S&P SmallCap 600 apply only to eligibility determination.

“Therefore, if any of the proposed changes are adopted, such changes would not result in a megacap company’s automatic inclusion within those indices. New constituent selection for those indices remains at the discretion of the Index Committee, subject to the relevant index methodology.”

Requirements on profitability and liquidity for large companies are also under review.

S&P DJI’s consultation is set to close on 28 May. Any changes will take effect before the market opens on Monday 8 June, unless otherwise stated.

Could SpaceX join the S&P 500 when it IPOs?

Record IPOs – like those anticipated by SpaceX, Anthropic and OpenAI – pose unique challenges for index methodologies as they currently stand.

Current estimates are suggesting SpaceX could float with a market capitalisation of between $1 and $2 trillion. FTSE Russell suggested OpenAI could list with a market cap of around $1 trillion and Anthropic around $350 billion. It’s worth remembering that float dates have not yet been set and suggested values and IPO levels are purely speculative.

The providers agree their previous benchmark rules were set up in a very different IPO environment, with more conventional listing profiles. All proposed changes look intent on improving liquidity, fairness and governance standards for index investors.

Market research firm Morningstar, which acquired the Center for Research in Security Prices (CRSP) in February, now benchmarks the entire US equity market, spanning market caps, investment styles and sectors.

It said it was important to adjust eligibility rules so its benchmarks remained relevant to new market realities.

Alex Bryan, director of global equity indexes at Morningstar, said: “The picture here is not radically changing. Even without any changes, a company like SpaceX would probably work its way into all the major indexes eventually. And when companies are added to indexes, I think that only helps deepen the liquidity and improves price discovery. It’s just that instead of being included in months or a couple of years, they could be compressed to a couple weeks or a few days.”

When companies are held private for longer, much of their growth happens before mainstream investors can gain ready access. Bryan said these proposed changes should give passive investors comparable access to active managers.

Most index providers have methodologies designed for much smaller IPOs. Historically, providers required companies to have a certain proportion of their shares available to be freely traded (free float) – before they would be added to an index. Morningstar’s free-float threshold is set at 10% of total market capitalisation, for example.

But a company like SpaceX could have a relatively small IPO in percentage terms and still be one of the largest and most significant companies in the world.

Bryan said: “One of the requirements that Morningstar and others have had is that a new company coming in has to have a certain percentage of their total market cap in free flow to qualify. And 10% of close-to $2 trillion valuation is higher than the IPO that SpaceX is planning to come to market at.

“There’s a recognition across the industry that the historical legacy approach didn’t really anticipate these megacap IPOs at these enormous valuations; they were meant to sidestep thinly-traded small cap stocks.”

The team also made the point around liquidity and transaction costs. Share prices can become volatile around an IPO, leading to price uncertainty and potentially higher trading costs for investors.

But Alex Poukchanski, director of index analytics for Morningstar Indexes, pointed to recent evidence suggesting such volatility typically settles within a few days, especially for very large IPOs, reducing the likelihood of higher transaction costs.

What could a change in index inclusion rules mean for investors?

With private companies remaining private for longer, it’s understandable that stock exchange providers have been keen to reignite flow towards public markets; one way of doing so is to relax some of the headline rules.

“It does make [an IPO] more attractive – particularly for more entrepreneurial companies,” said Dan Coatsworth, head of markets at investment platform AJ Bell.

Coatsworth added that if the likes of SpaceX are listed quicker, it opens up a whole wave of buying from tracker funds as soon as they land on the stock market.

“The last thing any company wants is to join the stock market, not see any interest in its shares and the share price just drifts away,” he said.

While SpaceX, Anthropic and OpenAI have been the names in recent focus, their experience might well pave the way for smaller companies.

One potential trade-off is the chance of sharp share price movements in the early stage after being added to an index.

“You’ll get loads more buying but that could also prompt some investors who got in quickly, looking to trade on a short-term basis, which might trigger massive volatility.”

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.

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Bank stocks were hit hard by the 2008 financial crisis. Years of heavy borrowing left many banks exposed, and some of the most trusted names collapsed. Investors faced huge losses as governments stepped in with taxpayer-funded bailouts. In response, regulators introduced strict new rules to prevent a repeat. These measures weighed on profits for years, but the sector has now come through that difficult period. Today, banks are much safer than they were before the crisis. Big investors have returned, helping to push up share prices; some have even tripled in recent years. As valuations edge back towards more normal levels, an important question remains. Do these high-yielding stocks still deserve a place in a portfolio, or have the easiest gains already been made?

Bank stocks’ wilderness years

For more than a decade, the banking sector struggled to regain the confidence of investors. Most professional fund managers suffered significant losses in the 2008 crash and subsequently found the industry difficult to navigate. Investors discovered they lacked understanding of complex balance sheets. Consequently, their appetite for banks' shares vanished for a generation. Even today, many professional investors remain wary because they find the internal mechanics of a global bank difficult to decipher.

While investors remained cautious, regulators rebuilt the global financial architecture. There has been a substantial increase in banks' capital, the cushion that stands between bank assets and insolvency. Core capital ratios, which give the size of this cushion expressed as a percentage of the bank's total risk, were as low as 4% pre-crisis; today, they often exceed 15%. In the UK, the Vickers Report mandated a separation between retail and investment banking operations. This altered the nature of the business and kept valuations low.

Jamie Dimon provided the first credible signal that this era of stagnation was ending. In February 2016, the chief executive of JPMorgan Chase invested $26 million of his own money into his bank's stock. He purchased the shares at roughly $56 per share, which aligned with the company's book value at the time. Dimon realised that the regulatory clean-up was largely complete. He saw an institution that was well-capitalised and undervalued, yet still priced as if it was ruined. His investment marked the start of a decade-long rally that eventually saw the stock price rise more than fivefold. It would take several more years and a radical change in the interest-rate environment for the rest of the market finally to reach the same conclusion.

The return of inflation

The stagnation of the previous decade ended with the return of inflation. Central banks tackled inflation by raising interest rates from near-zero to 5% and, with that, the fundamental engine of banking profit returned to health. This engine is the “net interest margin” – the difference between the interest a bank pays to its depositors and the interest it receives from its borrowers. For years, the industry struggled to generate a decent return in a world where interest rates were near-zero. The shift to higher rates boosted profits.

How much banks paid their depositors played a big role in this windfall – that is, how much of a central-bank rate rise was passed on to savers. When rates went up, banks were slow to increase interest on current accounts. At the same time, they quickly raised the cost of mortgages and business loans. This delay helped to boost profits. In theory, this rise in profits should only be temporary. But it made it easier for a bank to manage future earnings through a “structural hedge”, allowing them to lock in interest rates for several years and smooth profits as rates fall. The result is a more stable and predictable income stream. This improved profitability has transformed how banks manage their capital. After a decade of hoarding cash to satisfy regulations, they are now paying a lot back to shareholders via a mix of dividends and share buybacks. Total shareholder yields, combining dividends and buybacks, now often exceed 10% a year.

Strong recent results from the biggest banks have cast doubt on the idea that upstart digital challenger banks will disrupt them. While the challengers achieved high user numbers and launched attractive software, they lacked the massive and low-cost deposit bases that the traditional banks enjoy. The incumbents used their superior cash flows to adopt the best elements of the digital revolution, investing billions in their own platforms while maintaining the trust and regulatory licences required to dominate high-value lending, such as residential mortgages.

The established banks were also better able to absorb the higher costs of regulation and cybersecurity. For a smaller challenger bank, the compliance burden is often a significant percentage of its total revenue. For a giant bank, it is a manageable operational expense. Some challenger banks, most notably Revolut, have grown to a large size, but the biggest effect of the new banks is a forced modernisation of the older ones.

This combination of rising margins, disciplined shareholder returns and the resilience of the established model has restored the sector's momentum. The banks have demonstrated that they are no longer just safe utilities. They are profit-seeking enterprises with the capacity to deliver high yields to patient investors. The current challenge for investors is to identify which institutions can sustain this performance as the interest-rate cycle matures. The market has recognised the recovery, but the divergence between the winners and the laggards suggests that selection remains critical.

How to navigate the banking market

There are at least three distinct types of banking. Retail banking is the familiar world of the high street, managing residential mortgages and personal savings for millions of customers. Corporate banking offers services to the commercial sector, extending credit to firms and facilitating international trade. Investment banking is a more volatile endeavour that involves mergers, debt issuance and investing in the capital markets. The latter depends on the shifting appetites of the financial markets, which introduces a level of unpredictability that many investors find unsettling. The market typically rewards the steady stability of retail lending with a higher multiple, while it views the inconsistent profits of investment banking with caution.

The main concern for investors is the progression of the interest-rate cycle. Banks generally benefit from rising interest rates because the income they generate from loans increases more quickly than the interest they pay to depositors. However, as rates plateau this advantage often diminishes. Customers eventually move their money from low-interest current accounts into higher-yielding fixed-term products. This shift increases the bank's cost of funding and can lead to a lower profit. Asset quality is another area of vulnerability. Extended periods of high borrowing costs can put pressure on both households and businesses, leading to a rise in loan defaults. The commercial real-estate sector is currently viewed with particular caution, especially in markets where office and retail property valuations have fallen. If a bank has a high concentration of lending in these areas, it may be forced to raise its loan-loss provisions, which hurts profits.

Political and regulatory risks are also a factor. Governments may consider windfall taxes on high bank profits during hard times. Regulators often introduce new rules on capital requirements or consumer protection. Such measures increase operational costs and limit the amount of cash that banks are able to return to shareholders through dividends and buybacks.

Finally, structural shifts in the financial system present long-term challenges. The rise of non-traditional lenders and private credit markets has introduced new competition for corporate lending. Furthermore, the development of digital currencies could alter the traditional deposit-taking model. If consumers begin to hold significant portions of their wealth in digital sovereign currencies rather than bank accounts, the industry's funding costs could rise substantially.

To assess a bank accurately, investors must look past the price-to-earnings ratios used for ordinary companies. Instead, they prioritise the price-to-tangible-book-value ratio. This metric compares the share price against the net value of the bank's hard assets, once intangible items such as goodwill or brand value are stripped away. It provides a realistic view of the bank's worth if it were liquidated today. A bank trading at a discount to this figure suggests that the market believes the management is failing to earn its way, or that the assets on the balance sheet are not as safe as they appear. Conversely, a premium indicates that investors expect the institution to generate superior returns for years to come. In this new higher-interest-rate environment, investors must distinguish between high-quality cash machines and potential value traps.

The efficiency leaders of the banking industry

JPMorgan Chase (NYSE: JPM) remains the undisputed benchmark for the global banking industry. It is the largest bank in the world by a significant margin and is valued at more than double its nearest competitor. This scale allows the firm to simultaneously dominate both investment banking and retail lending. Under the leadership of Jamie Dimon, the bank has maintained a return on equity of nearly 16% while investing billions into its technological infrastructure. While the valuation is high compared with peers, its operational dominance and so-called “fortress balance sheet” provide a unique safety net. It is the go-to investment for those who wish to gain exposure to banking.

Lloyds Banking Group (LSE: LLOY) is a direct bet on the British economy. Unlike its more international rivals, Lloyds Banking Group generates the majority of its profit from domestic retail and commercial lending. Its net interest margin has improved significantly in recent years as it benefited from the shift in interest rates. With a price-to-tangible-net-asset-value ratio of 1.5 times and a healthy return on equity, the bank has become a favourite for dividend-seekers. Its aggressive share buyback policy continues to support the shares even during periods of domestic economic uncertainty.

HSBC (LSE: HSBA) has focused its efforts on the high-growth markets of Asia, which now drive the majority of its earnings. The bank trades at 1.7 times tangible net asset value and delivers a return on equity of 13.7%. For the income investor, the appeal lies in consistent dividends and regular share buybacks. However, the heavy exposure of HSBC to Hong Kong and mainland China remains a double-edged sword. These regions offer superior growth potential, but also introduce geopolitical risks.

NatWest Group (LSE: NWG) has completed its journey from a government-controlled institution back to a fully private enterprise. Many investors will remember the bank as the Royal Bank of Scotland, which rebranded to distance itself from the reputational damage suffered during the 2008 crisis. The bank has shown remarkable profitability recently, with a return on equity approaching 20% in its most recent results. The shares trade at a more modest 1.3 times tangible net asset value, offering an attractive entry point for those seeking exposure to banking. Its focus on digital efficiency has allowed it to maintain a competitive edge.

The recovery candidates

Barclays (LSE: BARC) trades at a discount of 0.8 times to tangible net asset value, despite delivering a return on equity of more than 10%. The market remains cautious regarding its large investment-banking division, which requires significant capital and produces volatile returns, but management recently vowed to return substantial capital to shareholders by the end of this year. If the bank can prove its investment arm is no longer a drag on the retail business, the potential for a valuation re-rating is substantial. It remains an interesting candidate for those looking for value and who are comfortable with higher risk.

UniCredit (Milan: UCG) has emerged as one of the most efficient banks in the eurozone. Under a disciplined management team, the Italian giant has achieved a return on equity of nearly 17%, far outstripping many of its domestic and international peers. It trades at 1.5 times tangible net asset value, reflecting a market that has finally begun to appreciate its streamlined operating model. By aggressively cutting costs and returning capital, UniCredit has proved that a European bank can thrive without the tailwinds of a massive domestic mortgage market.

Deutsche Bank (Frankfurt: DBK) has historically been the sick man of European banking. After years of losses and scandals, the bank has finally returned to consistent profitability, posting a return on equity of 9.2%. Reflecting this, it remains one of the cheapest major banks in the world, trading at just 0.7 times tangible net asset value. The discount is due to its poor reputation, but the structural improvements in its corporate and private banking arms are undeniable. For the patient investor, it represents a bet that the final stages of its turnaround will lead to a revaluation.

The specialists

BNP Paribas (Paris: BNP) is the closest institution Europe has to a diversified American-style giant. It operates a massive corporate and investment bank alongside a stable retail presence across several countries. Trading at 0.9 times tangible net asset value, it offers a diversified stream of earnings and a healthy dividend yield. The bank has successfully used its scale to gain market share as American rivals pulled back from certain European markets. It is a solid choice for those who want exposure to European growth without the concentrated risk of a single-country lender.

Banco Santander (LSE: BNC) has exploited its unique geographic footprint, spanning from Spain to Brazil and the US, to protect itself from regional economic shocks. The bank trades at 1.7 times tangible net asset value and delivers a return on equity of more than 12%. Its diversified model means that when the European economy slows, its Latin American operations often provide a profitable cushion. This geographic spread is its greatest strength, although the complexity of managing such a diverse empire often leads to a slightly lower valuation than its simpler peers.

Standard Chartered (LSE: STAN) provides a unique way to gain exposure to the emerging markets of Asia, Africa and the Middle East. Unlike HSBC, it has a smaller retail presence and focuses more heavily on corporate and institutional banking. It trades at 1.1 times tangible net asset value and has recently exceeded its own profitability targets. It is a primary beneficiary of the rise in intra-Asian trade and is well-positioned to benefit from the ongoing economic development in its core markets. It remains an attractive option for investors looking towards the emerging economies.

Bank of America (NYSE: BAC) is the second-largest lender in the US and serves as a bellwether for the US consumer. It trades at 1.8 times tangible net asset value, a premium that reflects its massive deposit base and its leading position in digital banking. While it is highly sensitive to US interest rates, its diversified earnings from investment banking and wealth management provide stability. It is often seen as a more conservative alternative to JPMorgan Chase for those who want exposure to the American financial system.

Goldman Sachs (NYSE: GS) remains the premier investment bank in the world. Unlike the universal banks, Goldman Sachs is heavily weighted towards merger advice, trading and asset management. This makes its earnings more volatile and dependent on the health of the financial markets. After a period of strategic drift into consumer banking, the firm has refocused on its core strengths. It remains an option for those trying to gain exposure to pure investment banking rather than more traditional lines of business.

The best bank stocks to invest in now

The banking sector has transitioned from a source of risk to a reliable engine of shareholder returns. For those seeking stability, Bank of America offers a good balance sheet and direct exposure to the US economy. Its historical resilience provides a degree of security for investors prioritising long-term capital preservation. Barclays represents a more opportunistic choice. It remains priced at a discount compared with its domestic peers, and the successful execution of its current strategy should allow this valuation gap to narrow, rewarding patient holders. Finally, Standard Chartered serves as a unique vehicle for those desiring exposure to emerging markets. As a UK-listed entity, it provides a regulated gateway to high-growth regions in Asia and Africa.

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.

Five years ago there were lots of reports about how the finance industry was going to move from London to Paris, Amsterdam or Frankfurt. In the wake of Britain's departure from the European Union, the City would lose its role as the main hub in the finance industry and all the jobs and tax revenues it created. Deals would have to be made within the bloc, and trades would have to settle under EU rules, so there would be little space for a country outside the EU. The only real question was which major city on the continent would take London's place.

But traders and analysts can forget about freshly baked croissants for breakfast and two-hour lunch breaks. It turns out that the US mega-banks are not moving en masse to Paris after all. Last week, JPMorgan started moving some of its staff in Paris back to London. Its chief executive, Jamie Dimon, warned back in 2021 that the bank might well move all its European operations out of the City. Instead, it has been steadily increasing its headcount and building the biggest tower in Canary Wharf to house them all. Its plans to make Paris the centre of operations appear to have been quietly wound down.

It is not hard to understand why. President Emmanuel Macron's promises to carve out a special regime for global bankers have come to nothing. The “temporary” tax surcharge on anyone earning more than €250,000 a year – not much for a star banker at JPMorgan – has been extended for another year. With the government paralysed and a huge deficit to fix, France will have to put up taxes again.

Meanwhile, Amsterdam is about to become a no-go zone for investors. The Dutch city mounted a challenge to London that was every bit as serious as the one from Paris. With its long traditions in finance and a powerful stock market, it attracted a series of high-profile listings, including giants such as Universal Music. But now the Netherlands is planning to extend the capital gains tax at 36% even to unrealised gains. In effect, if your investments go up in value by 10% over the course of the year, you will have to pay a big chunk of that in tax, even if you have not yet cashed them in.

Even worse, you won't be able to claim any kind of refund or allowance if those same investments fall by 10% the following year. In effect, the state will confiscate 10% of your winnings, but it won't share in any of the losses. It will be the most punishing system of capital-gains taxation anywhere in the developed world. It is impossible to see how Amsterdam can survive as any sort of financial or business centre under that regime. As for Frankfurt, there is absolutely no sign of any banks moving to the city and the German economy remains stagnant despite the huge rise in government spending to try and get it growing again.

How the City of London can reclaim the crown

Add it all up, and this is the perfect moment for London to reclaim its place as Europe's main financial hub. There have been modest moves in the right direction. Some of the listing rules have been relaxed, the cap on bankers' bonuses has been lifted and a new junior market in “unquoted companies” has been created. We are promised more reforms in the King's speech later this month. It is a start, even if only a very modest one.

But there are also obstacles: higher income taxes, the ending of non-dom status for finance staff moving from abroad, some of the highest inheritance taxes in the world, and now a higher rate of tax on interest and dividend payments as well. It may well get worse in the next Budget. None of that will do anything to persuade any more bankers to move to this side of the Channel.

The government should be doing a lot more to help. It could introduce a new version of the non-dom regime, perhaps modelled on Italy's flat-rate tax scheme that has helped create a boom in Milan. It could turn the stock exchange into a genuinely light-touch regulatory centre for new listings. Finance remains one of the world's largest industries and one in which Britain has huge residual strengths. Brexit has not damaged it nearly as much as everyone predicted. But the City will have to work a lot harder if it is to reclaim its crown.

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 in UK small-cap stocks does not necessarily mean exposure to businesses struggling against larger rivals. On the contrary, we actively seek smaller companies that dominate niches. They may not be FTSE 100 giants, but they are leaders in their specialist areas, with the scale, data and strategic positioning to thrive. The UK small-cap sector is rich with such firms. Market leadership in a niche area confers several key advantages. It can enhance pricing power, which is especially valuable in today's inflationary environment, increasing the likelihood of profits. We place equal importance on competitive barriers and the structure of the industry in which the company operates. Without barriers to entry, competitors can swiftly erode profit margins even as demand grows. Here are three examples of smaller companies that we believe have an edge.

UK small-cap stocks to consider for your portfolio

MONY Group (LSE: MONY), owner of the MoneySuperMarket and Money Saving Expert brands, is one of the UK's market-leading price-comparison platforms. It may not be the largest in every category, but it has the broadest offering, which is important because by offering a multitude of products – for example, current accounts, broadband, energy, loans and travel insurance – MONY frequently interacts with its customers. Its rewards programme, SuperSaveClub, goes further in helping to convert a one-off transaction into a recurring revenue stream and reduces MONY's reliance on Google and television advertising. It is growing quickly: it had 2.1 million members and accounted for 16% of group revenues in 2025.

Concerns about the risks posed by AI have brought the shares down to attractive levels. There are also a number of barriers to entry that will help cement MONY's competitive advantages, including regulation, links to the multitude of insurers and brand strength. It says something that Amazon attempted to enter this market in 2022, but pulled out 15 months later.

Moonpig (LSE: MOON) is a UK small-cap stock that dominates the country's online greetings-cards market with a 70% share. That means data. Moonpig has more than 100 million customer reminders on its system, which it is using to convert one-off purchases into repeat business. Its subscription model, Moonpig Plus, has surpassed one million customers, and they are using the service not only to buy cards more often, but also to spend more by adding gifts. The business floated at an inflated price. Five years later, and with the share price about 50% lower, it now looks like a good investment.

Victorian Plumbing (LSE: VIC) is another market leader. Its acquisition of its (near) namesake Victoria Plum has cemented its strong market position, and the firm can now invest far more effectively in its brand. Its recent move to a new warehouse should enable it to scale, and it could double its sales within its existing infrastructure. Like Moonpig, Victorian Plumbing was a beneficiary of Covid and was overvalued at its initial public offering. More recently, the shares have been hit by concerns about UK consumer spending and its decision to invest in entering the homewares market. These concerns are temporary. The Iran conflict is pushing up inflation, delaying interest-rate cuts and has further eroded fragile consumer confidence. Nevertheless, consumer savings rates are high, and household debt-to-income levels are at a generational low. We see this as a strong platform for when consumers' confidence does recover.

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.

What are prediction markets?

Prediction markets are online peer-to-peer exchanges that let users wager money not just on sports and politics, but on everything from the chances of a full US ground invasion in Iran to what colour tie Donald Trump will wear on a particular day. The two biggest sites, Polymarket and Kalshi, have exploded in popularity over the past two years, as US federal regulators have taken a far more relaxed approach.

Trading volumes on the two sites were $50 billion in 2025, up from $16 billion the year before, and are set to be many times that this year. According to analytics firm The Block, cited by The Wall Street Journal, trading volumes on the two leading platforms rocketed to $24.2 billion last month, up from $1.8 billion a year earlier. Donald Trump Jr is an adviser and investor in Polymarket, and Trump Sr's media company is planning its own site, Truth Predicts. Meanwhile, several US states are suing the firms on the grounds that they facilitate illegal gambling.

Are prediction markets risky?

Betting on events that might or might not happen is obviously wide open to people taking advantage of inside information and/or seeking to influence events. Last month, a US soldier was the first person to be charged with insider trading on prediction markets. Gannon Ken Van Dyke is charged with using classified information to place roughly 13 bets worth $33,034 on positions including “US Forces in Venezuela” and “Maduro out”.

The sites claim they serve an important wider function in terms of price and information discovery – indeed, the Federal Reserve, no less, recently published a paper finding that Kalshi's market participants did a usefully good job of predicting changes in interest rates and GDP. Polymarket says it “aggregates wisdom from informed users, often outperforming experts”. But if those users are too “informed”, it stacks the deck against the rest of the players. Exactly how “informed” a user is permitted to be before they are doing something illegal is a question that's certain to play out in the courts many times in forthcoming months and years.

Are prediction markets allowed in the UK?

In theory, both Polymarket and Kalshi are regarded as unlicensed gambling sites by UK authorities and are blocked to UK-based users. In practice, there are routes (involving VPNs and cryptowallets) available to those who wish to bet. This week, the site was offering 20 different markets related to the local and devolved government elections in the UK, including mayoral elections. Unless an awful lot of Americans have developed an unlikely expertise in Britain's local politics, it seems probable that the “informed users” in question are UK-based.

How do prediction markets work in practice?

The principle is similar to sports-betting exchanges, in that prediction markets involve peer-to-peer betting (or “trading” for those who fancy themselves as pros) rather than betting against a bookmaker. On Polymarket and its competitors, unlike a conventional bookmaker, the house doesn't set the odds: it facilitates a peer-to-peer exchange – all bets are binary Yes/ No – and takes a fee.

At the time of writing, Polymarket is offering a market on what the highest temperature will be in London on 7 May. A high temperature of 16˚C is priced at 39 cents, meaning the market of interested punters thinks that there's a 39% chance of that event happening. If you bet Yes – and get it right – you get a dollar, and have made 61 cents profit on each 39 cents you stumped up.

Can you trade your position?

Yes, you can sell out of either winning or losing positions before the event is resolved – and most users do just that. Say you buy Yes at 45%, and it moves to 55% as people think it's becoming more likely. You can cash out early and make a smaller profit of 10 cents. This is an important point in terms of market manipulation and abuse by insiders – you don't need to win your prediction to make money, you simply need to move market sentiment and cash out. On 9 April, for example, the official temperature recorded at Charles de Gaulle airport jumped suddenly before falling back. The spikes were due to suspected tampering with sensors and coincided with suspicious bets on Polymarket, with hundreds of thousands of dollars in play.

Do prediction markets facilitate corruption?

It appears so. According to analysis by the Anti-Corruption Data Collective, a non-profit research and advocacy group, more than half of “long-shot” bets on military action made on Polymarket – defined as wagers of $2,500 or more at odds of 35% or less – are successful. That suspiciously high average win rate (of 52%) compares with just 25% in politics and 14% for all long-shot markets. The day before the US attack on Iran on 28 February, 150 people made trades of at least $1,000 predicting an imminent strike.

The risks go beyond insider trading, says Sam Freedman on Substack. “The more lucrative these markets become, the more predictions about the future will affect decision-making and behaviour” – and the more public trust will erode as misinformation aimed at manipulating markets becomes widespread.

Should you have a punt?

For a bit of fun, maybe. As a way of making money, probably not. The Wall Street Journal finds that 70% of users lose money and that 67% of all profits on Polymarket go to just 0.1% of accounts. “Casual traders are bleeding cash while a small number of sophisticated pros – including trading firms with access to vast streams of data – eat their lunch.”

Separate analysis by Charles Martineau, a professor at Toronto, came up with similar results. His paper concluded that 69% of Polymarket customers lose money, while the top 1% captured three-quarters of the profits. On Kalshi, too, the large majority of users lose money, with 74% of accounts unprofitable over the past month (on the firm's own figures). Good luck beating those odds.

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.

At Janus Henderson's North American Income Trust (NAIT) we focus on US income stocks – quality franchises that consistently generate cash and have disciplined capital-allocation policies focused on investment in the business to sustain competitive advantage while paying a progressive, covered dividend. Surplus cash beyond this may be used for bolt-on mergers and acquisitions, or to repurchase shares when the stock is dislocated from long-term assessments of fair value. The NAIT has a strong record of paying a progressive dividend and growing revenue reserves since the fund's inception in 2012 (it was converted from the Edinburgh Tracker Trust). The average dividend in the portfolio is 3% and dividend growth averages an attractive 6%-7%.

Our revenue reserves can comfortably cover one year of payouts and may be used if needed. However, there was only one small dividend cut during the 2020 pandemic period and none since then. Many UK investors may not automatically think of US income stocks, but there are several that offer attractive and growing dividends. The US has a history of superior earnings growth, which can often translate into higher dividend growth, too.

How to gain exposure to US income stocks

Dell (NYSE: DELL) is a technology infrastructure company uniquely positioned to grab a slice of the next wave of corporate spending on AI applications. Its scale, global supply chain and deep relationships with customers from the private and public sectors make it a preferred supplier of AI servers and data-storage technology. As enterprises move from experimentation to deployment, Dell will benefit from recurring technology update cycles. Growing profitability is supported by the company's shift toward higher-value technology infrastructure and its disciplined cost management. Debt has been cut and capital returns support the yield. We believe Dell's valuation fails fully to reflect the durability of demand and the firm's exposure to capital expenditure on AI.

Johnson & Johnson (NYSE: JNJ) is another US income stock that offers a rare combination of earnings quality and durable growth. Following the spin-off of its consumer-health division in 2023, it is a focused, innovation-driven pharmaceutical company and a leader in medical technology that should comfortably deliver mid-single-digit revenue growth. It has a diversified drug pipeline, which reduces risk, and its franchises in oncology, immunology and cardiovascular treatments are best-in-class, which will support cash flows in the long term. The medical-technology sector is growing strongly and the worst seems to be behind the company when it comes to legal issues. This is restoring investors' confidence and valuations. With a strong balance sheet, consistent free cash flow and a long record of dividend growth, Johnson & Johnson remains a core holding in volatile markets.

Morgan Stanley (NYSE: MS) is a global leader in the capital markets. Its earnings have become more resilient following a strategic pivot toward wealth and investment management, which generates stable, fee-based revenues. These annuity-like income streams provide downside protection while preserving upside exposure to appreciation in the markets and net asset inflows. The firm's strong capital position is enabling it to buy back shares and grow dividends. We believe Morgan Stanley's improved position will deliver impressive gains tied to long-term growth in the financial markets.

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.

“It's a market of stocks, not a stock market” is an old cliché, intended to remind us why investing is ultimately about how well individual companies are doing from the bottom up and not a top-down view of the FTSE 100 or S&P 500.

I don't entirely agree with this thinking, at least in the modern world. The growth of index investing has meant that many people now invest in the whole market or in broad sectors and don't care about the companies they hold. Money flowing in and out of funds can do more to determine whether valuations rise or fall than real changes in a business's fundamentals.

Still, it is always important not to let big-picture fears blind us to how well individual stocks are doing. If most companies are seeing robust earnings growth from the bottom up, it is likely that the overall index will keep going up. And right now, the reality is that earnings growth remains very strong in the US.

The year-over-year blended growth rate (ie, including both results reported so far and latest estimates) for the S&P 500 is currently 15.1%, according to FactSet – the sixth successive double-digit quarter. The index is expensive: at just over 7,100, it's on a trailing price/earnings ratio of 28. Yet if earnings keep compounding like that, it's not really a stretch to stay bullish.

The greatest threat to earnings growth

In the medium term (maybe three to five years), one has to wonder whether giant companies can continue to earn such high margins: the S&P 500 net margin is once again setting a new record of 13.4%. The geopolitical and political trends that let businesses – especially multinationals – become ever more profitable over several decades are shifting. Maybe this goes into reverse. But a few years is a lifetime in the markets and we are obviously not there yet.

In the shorter term (maybe a year or two), the extent to which AI mania is underpinning this boom cannot be ignored. In the tech sector, earnings growth is at 46%. There is a very fine line to be walked here: if all this investment does not bring huge productivity gains, it will grind to a halt. If it puts too many people out of stable employment, the political backlash could be equally dangerous. Yet all investors care about is what will happen in the next couple of quarters, and there is no sign of the boom letting up so far.

So what is the greatest ultra-short-term threat? Energy. The amount of oil at sea when the Middle East crisis started means that the consequences of the closure of the Strait of Hormuz and the shutting in of millions of barrels a day of crude is not really translating into shortages yet. Even if supplies resume tomorrow, there will be a lag and the effects will still show up over the next couple of months. But if they do not resume soon, the crunch is going to become very evident. A market focused on historic earnings and understandably upbeat forecasts is not pricing that in.

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.

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At the beginning of March, Aptiv, a global industrial technology company, approved the spin-off of its electrical distribution systems business into a new publicly traded company, Versigent (NYSE: VGNT). When the new company started trading at the beginning of April, it's fair to say investors were underwhelmed, to say the least. There were hopes that the market would be willing to pay up to $31 a share, but it closed the day below $28 per share.

Yet in 2025, the firm reported $8.8 billion in revenue, $528 million in net income and $893 million in adjusted earnings before Ebitda. The shares are up slightly since the initial public offering, but it is still only valued at $2.5 billion, which looks cheap relative to earnings. And unlike most spin-offs, which are often loaded with debt to offload liabilities from the parent firm, Versigent's leverage is only 1.3 times Ebitda, roughly the market average and well below the market median of 2.6 times, according to S&P Global.

Why is Versigent so unloved?

Versigent is one of those businesses that often fly below investors' radars, but that play an integral role in the global economy. With 138,000 employees in 25 countries, the group has a huge footprint and is deeply embedded in the supply chains of major manufacturers in the vehicle, agricultural and energy-storage sectors.

Officially, Versigent describes itself as “a global leader in the purposeful design and advanced manufacturing of low- and high-voltage electrical architectures”. In simple terms, this means the company designs, develops and manufactures components to help improve the efficiency of electrical systems in vehicles.

This is a highly specialised and labour-intensive process that the original equipment manufacturers have always been happy to outsource, giving Versigent a critical advantage. The group is already one of the top-three suppliers in every region in which it operates and its technology is embedded in one in every six vehicles produced globally (one in three for electric vehicles (EVs)). In addition, around 75% of sales are linked to full-service programmes, in which the firm becomes deeply embedded in electrical-architecture design early in the development process, tying the manufacturer and Versigent together through the design, development, testing and production phases.

In a world that's becoming increasingly dependent on electrical infrastructure and where vehicles are becoming smaller and smarter, the company's services are in demand. UBS has pencilled in revenue growth of 13% by the end of the decade, driven by rising demand for the high-voltage equipment it develops and sells to power network and battery-storage providers, and EV charging systems.

But growth isn't the story here; it's cash generation. Versigent will boast an Ebitda margin of 10.3% for 2026, according to UBS. The company has said it can drive 200 basis points of margin expansion by 2028, although UBS thinks 100 basis points is more likely (the base case). That would still be a near 10% increase on what is already a healthy level of cash generation.

Savings are expected to come from automation. At 80% of sales, manufacturing costs are the firm's largest overhead expense. Management has estimated that 30% of its workforce performs basic tasks, such as wire-cutting and stripping. In its two Chinese factories, these processes are mostly automated, and management wants to roll this out across the rest of its business. As a newly separated business, there are likely to be some additional costs in the short term as employees bed into new functions and the company fills positions previously overseen at the group level, but as an independent company Versigent should be able to identify and strip out costs faster than it would otherwise as part of a larger group.

Versigent is a cash cow

Versigent's appeal lies in its cash generation. UBS believes free cash-flow conversion on net income could hit 80% by the end of the decade. On top of that, analysts are only projecting “minimal capital spending” over this period (about $250 million per annum), so the majority of this should fall to the bottom line. For a company with an already healthy balance sheet, this implies that there will be a healthy amount of cash available to return to investors. Versigent's own projections suggest $1 billion of free cash flow over the two years to 2028 (UBS has pencilled in $830 million).

Cash returns could start imminently. Pre-spin-off, Versigent's management said it required only $400 million in cash for day-to-day liquidity, compared with about $700 million on the post-spin-off balance sheet. Coupled with its regular free cash-flow generation, Versigent could have somewhere in the region of $1.1 billionin extra cash in the next two and a half years to the end of 2028. Analysts at UBS have crunched the numbers on Versigent's potential and come up with some eye-catching figures. The firm's peers pay out around 23% of free cash flow as a dividend. At present, Versigent's average yield is about 2.2%. UBS estimates that if the company pays out 23% of free cash flow (about $170 million to the end of 2028), the shares could yield around 3%.

Assuming the company does not decide to go hunting for acquisitions, that would leave about $930 million for share repurchases, enough to buy back 42% of the group's current outstanding shares. Add that together and it seems as if Versigent has the potential to return about 44% of its current market value to shareholders by the end of 2028. If that isn't enough, the company is around 30% cheaper than its peer group valued by free cash-flow yield. Versigent appears to be somewhat of a hidden gem.

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Against an uncertain global backdrop, British stocks have touched new highs in 2026, once again showing the UK's resilient nature when compared with other developed markets. As contrarian-minded value investors, we are firm believers in the maxim that “price is what you pay, value is what you get”, and the UK's outperformance has as much to do with the modest starting valuation of many of its companies as with its preponderance of resilient, cash-generative businesses. It's one of the reasons the UK remains a fertile hunting ground for those seeking out under-appreciated stocks that have fallen out of favour with investors but have the scope to deliver strong risk-adjusted returns for those willing to take a longer-term view. The following three companies are examples of businesses we think the market may be overlooking.

Speciality chemicals company Croda (LSE: CRDA) is a British stock with contrarian attractions. The shares are coming out of a period of deep underperformance after a confluence of issues served to undermine the business's former world-class reputation and history of high margins, good growth and attractive returns. End markets have proved tough and high levels of investment in exciting new pharmaceutical-oriented capabilities have yet to pay off. Nevertheless, over time we have become convinced that this business is far from broken and there is scope for substantial improvements in profitability on the back of an ambitious cost-reduction programme, well-invested assets and recovering demand. Shareholders can expect a market-beating yield of more than 4% while they wait.

Communications group WPP (LSE: WPP) is another British stock we think has reached a price that deeply underestimates the intrinsic value of the business. Under new leadership, the business is consolidating so as to leverage the enviable talent and technological prowess at its disposal. After a period of extended underperformance against a tough market backdrop, for the last two consecutive quarters, the company has led the market in winning new business. This supports our view that WPP has turned a corner and reinvigorated its competitiveness in the advertising and marketing business, where scale and data are all-important. There is clear evidence that the business is making real progress in transforming the group's structure, and ample cash on the balance sheet gives the firm options. The shares are trading on an exceptionally undemanding price/earnings ratio of less than five times and offer a yield of well over 6% for the next year, so investors will be well compensated for the risk.

Chesnara (LSE: CSN) is a lean, tightly run insurer led by a seasoned team that specialises in buying closed life-insurance books, often at big discounts to book value. These acquisitions generate reliable, long-term cash flows, boosted by disciplined cost control and a proven ability to make the most of business synergies. The result is a dividend that rises every year, giving Chesnara the strongest record of continuous growth in UK and European insurance. A transformational deal for HSBC's UK Life business last year lifted the group into the FTSE 250 and delivered a one-off 6% dividend hike. With more deals in sight, a conservative balance sheet and an 8%+ yield, Chesnara stands out as an attractive income play that many won't have considered.

When a business falls out of favour, it sometimes doesn't take much for sentiment to start improving. These British stocks are not without risk, but they could offer rich rewards for patient investors over time.

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It's unknown who first nicknamed Mark Mobius, the legendary US stock-picker who has died aged 89, the “Indiana Jones of emerging-market investment”. But he certainly enjoyed playing up to the moniker. “The places I like to be are the places where nobody else wants to be” was a typical pitch, says The Telegraph. “I want to be there when there's blood on the streets,” he said. “Problems, crashes, people jumping out of windows… Fantastic.”

Mark Mobius, who ran the Templeton Emerging Markets Fund for nearly three decades until 2018 – growing it from $100 million to more than $40 billion under his leadership – certainly made many winning bets during crises, says Forbes India. He cleaned up buying quality stocks at rock-bottom prices during the 1997 Asian financial crisis and the Russian panic a year later, continuing the theme through the dotcom bust, the 2008 global financial meltdown and all subsequent dips. “If you see light at the end of the tunnel, it's too late to buy” was a favourite maxim.

At his peak, Mark Mobius was famous for criss-crossing the world in his Gulfstream jet (he travelled for 250-300 days a year), swooping down on bashed-up bargains. But his gung-ho rhetoric concealed more nuanced thinking, and his many books “offered an unusually human view of global finance”, says CNBC. “If you want to understand a market, start with its people,” Mobius wrote. The line distilled his belief that on-the-ground observation mattered more than abstract theory.

Mark Mobius observed in his biography that he had “toured rubber plantations in Thailand and road-tested bikes over the pothole-ridden roads of rural China”, says the Financial Times. He elaborated how he'd “choked on roast camel's meat, sheep's eyeball, guinea pig and dined (surprisingly well) on scorpions on toast”. He was a great storyteller whose calm manner and encyclopaedic knowledge reassured Western investors uneasy about political risk, currency volatility and opaque governance. “People say emerging markets are dangerous places to invest,” he once remarked. “But Bernie Madoff operated in the US for years.”

Mobius is quite rightly acclaimed for opening up a massive new investment class. But the nattily dressed “godfather of emerging markets” was held in equal affection in many of the territories he targeted, says Business Today (India). “He came to India during the economic liberalisation phase of 1991-1992 and fell in love with an expanding economy and its booming stockmarkets,” as well as its people and culture – and remained “a perma Indian bull” all his life. It was a similar story in China and Hong Kong, says the South China Morning Post.

Mark Mobius was a master at finding value

Mark Mobius' family background had nothing to do with finance – but it did open him up to different cultures. His German-born father, Paul, was a ship's cook and baker; his mother Maria was from Puerto Rico. Brought up on Long Island, he studied communications at Boston University, completed a doctorate in economics at MIT in 1964, and worked as a teacher before turning to investment, says The Telegraph. He moved to Hong Kong in 1967 and established his own research and investment business, later working for the British stockbroking firm of Vickers da Costa before the veteran investor John Templeton – himself a past master of spotting hidden value and a pioneer of global investment – invited him to create an emerging-markets fund. The rest is history.

Mobius's lean features and shaved head – a look he adopted in the 1960s after a fire in his apartment damaged his hair – made him a ringer for the Russian-American actor Yul Brynner. But he had his own unique magnetism, says Business Today. There was nothing of the US economic imperialist about him. He was a bridge-builder – and will be sorely missed.

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Shell, BP, HSBC, AstraZeneca, British American Tobacco – nobody's idea of an exciting portfolio.

Yet a study of every UK-listed stock over the past 50 years found that the top ten wealth creators, including these five, captured nearly a third of all the real wealth generated by UK stocks. Thousands of listings came and went in that time. These stayed and compounded, and also sometimes feature in the most popular stocks purchased by DIY investors.

This makes the current anxiety about market concentration worth examining. The Magnificent 7 now account for 39% of the S&P 500. Passive fund assets have passed 50% of all US equity fund assets for the first time.

In his January 2026 shareholder letter, Terry Smith warned that the shift into index funds is 'laying the foundations of a major investment disaster', though he conceded he couldn't say when or how it would end.

It's an argument that resonates. When seven stocks dominate a major index, something feels uncomfortable. But three recent studies, covering UK and US equities over periods from 50 years to nearly a century, tell a different story. Wealth creation has always been concentrated in a tiny minority of companies. The question isn't whether your index is top-heavy. It's whether the alternative gives you better odds.

And on that, the evidence is striking.

Which UK stocks created the most wealth?

Only three per cent of UK stocks created all the wealth. A newly published, peer-reviewed study in the Journal of Asset Management quantifies what many investors suspect but few grasp in full. Jonathan Fletcher and Michael O'Connell at the University of Strathclyde examined every stock listed on the London Stock Exchange, the Unlisted Securities Market and AIM between 1975 and 2024. Their finding: just 3.1% of those companies generated all of the market's aggregate net wealth creation in real terms.

The names that did the heavy lifting won't surprise anyone. Shell, BP, HSBC, British American Tobacco, AstraZeneca, Rio Tinto, GlaxoSmithKline and Unilever – dull yet dependable.

The top 10 alone captured nearly a third of all aggregate wealth created. These weren't the stocks that made headlines; they were the ones that compounded quietly while the headline stocks came and went.

More than half of all UK stocks failed to beat Treasury Bills over their lifetimes. The median stock lost money after inflation: a lifetime real return of −13.9%. AIM, the market segment most associated with exciting growth stories and tax-efficient wrappers, produced negative aggregate net wealth of −£2.6 billion.

This isn't a UK anomaly. Hendrik Bessembinder at Arizona State University, whose 2018 study first documented the pattern in the US, has updated his data through 2022. Across nearly a century of American equities, just 4% of stocks accounted for all $55 trillion of net shareholder wealth creation. The remaining 96% collectively matched Treasury Bills at best.

Two different markets. Two different time periods. The same conclusion: equity wealth creation has always been radically concentrated. The few carry the many.

So when only 3% of stocks generate all the aggregate wealth, today's top-heavy indices aren't a distortion. They reflect how markets work. And if you're picking individual stocks, you're betting you can identify those winners before the fact, from a pool where the median outcome is a loss.

Avoiding market concentration actually made things worse

If concentration is structural, what happens when you try to fight it? Mark Kritzman of Windham Capital Management and MIT Sloan and David Turkington of State Street Associates set out to answer that in their recent paper - The Fallacy of Concentration.

They built a dynamic strategy that reduced equity exposure whenever market concentration was historically high and increased it when concentration fell. The result: lower returns, higher risk and less than half the cumulative wealth of staying invested.

The buy-and-hold investor earned a Sharpe ratio of 0.52. The concentration-avoider earned 0.39. Both held the same average equity exposure over the full period, at 67.8 per cent. The difference wasn't about courage or conviction. It was about fighting a feature of the market that turns out not to be a bug.

Large companies aren't just large. They're structurally less volatile. Kritzman and Turkington found that the biggest decile of S&P 500 stocks had annualised volatility of 19.2 per cent, compared with 28.8 per cent for the smallest. A market dominated by large companies is, counterintuitively, a calmer one.

Smith is not wrong that passive flows direct money mechanically toward the biggest stocks. That's how cap-weighted indexing works. But whether that mechanism exists matters less than whether the concentrated index is more dangerous than the concentrated stock-picking portfolio. On that, the evidence is clear.

Buy the whole book

The Fletcher and O'Connell data leaves stock pickers with an uncomfortable question. If the vast majority of listed companies destroy value over their lifetimes, picking individual stocks looks less like a skill contest and more like a raffle. The rational response isn't to study the tickets harder. It's to buy the whole book.

Terry Smith, of course, would disagree. But his own record is instructive. Fundsmith returned 0.8% in 2025 against 12.8% for the MSCI World - Smith’s fifth consecutive year of underperformance.

Laith Khalaf, head of investment analysis at AJ Bell, noted that the fund has now lagged its benchmark over both five and 10 years.

Khalaf's wider point is worth hearing too: “Fundsmith's earlier outperformance was partly flattered by the low interest rate environment that suited Smith's quality style. Now that tailwind has reversed, the structural headwinds facing stock pickers are harder to ignore.”

None of that reflects on Smith's intelligence or his process. It reflects the odds, and those odds don't bend for reputation.

Market concentration is worth understanding. It's worth watching. But the evidence from three studies spanning two markets and close to a century of data points the same way: the risk most investors should worry about isn't a top-heavy index. It's a portfolio that bets against the 3 per cent carrying everything else.

For most of us, the better odds are hiding in plain sight.

Should you invest in China, or is it essentially “uninvestable”? That was the gist of the debate just a few years ago. The West can never quite seem to make its mind up about the Middle Kingdom. Once derided as cheap but tacky, in 2026 China is suddenly cool. Social-media influencers show off their indoor slippers and traditional Chinese medicine, while quipping that they are “learning to be Chinese”.

Polling by Pew Research shows that, while only 28% of Britons aged older than 50 have a favourable opinion of China, that figure doubles to 56% of the demographic aged 18-34. Where older Westerners see a repressive one-party state, the young scroll TikTok and share images of the futuristic “cyberpunk” city of Chongqing (it's worth a visit, if you can handle the brutal humidity).

A warning for those wanting to invest in China

This pendulum swing is nothing new. During the 2000s, China's extraordinary growth (14% in 2007 alone) led to feverish speculation about when exactly it would become the world's largest economy (2027, according to one widely cited projection). The story remained bullish during the early 2010s, as China used a massive infrastructure stimulus package to duck the stagnation plaguing developed economies after the great financial crisis. In the process, the country built the world's largest high-speed rail network, a service whose gleaming modernity makes Britain's trains feel like a donkey and cart by comparison.

But simultaneously, a more negative narrative took hold. The first signs of trouble came in summer 2015 after a parabolic run-up in Chinese shares went into reverse. The CSI 300 index plummeted 44% between June of that year and January 2016. A MoneyWeek cover at the time depicted a dragon roller-coaster hurtling downwards. In many countries, such a plunge would herald the beginning of a devastating recession. Not in China (GDP registered an official growth rate of 6.7% in 2016, a modest fall from the previous year).

In China, where the stock market is traditionally regarded as being little better than a casino, it is state banks, not investors, that decide where credit will be allocated. But it was a warning shot to investors. The most optimistic projections for Chinese growth didn't quite pan out. Today, total GDP is still only 65% of the US level, and a mere 15% of the level in terms of GDP per capita.

Still, grown it has, and at a rate and consistency with little precedent in world history. Yet those gains haven't accrued to those who decided to invest in China. Since the start of 2008, Chinese GDP has risen by 344%. The CSI 300? 1%. You can still make money if you invest in China, of course. Local shares have zoomed 43% higher since September 2023. But as a long-term investment, the case remains unproven. Stock markets rise and fall, but most trend upwards. It is the reason investing has a better reputation than gambling. Yet China's equity graph really does resemble a roller-coaster, with long climbs followed by hair-raising plummets.

China is far from the only emerging market to exhibit a disconnect between GDP growth and equity returns, although its case is especially extreme. The exact causes are much debated.

One important factor is simply that investors adore a good emerging-market growth story. That causes valuations to rocket, front-loading years of earnings growth into current valuations (something that current buyers of expensive Indian shares would do well to bear in mind).

A second reason is that many of the gains from growth tend to be captured off stock markets, particularly by landlords. Just imagine the fairy-tale returns from holding a patch of land in Shenzhen, an impoverished collection of fishing villages that blossomed in two decades into the centre of global technology manufacturing.

China's property bubble has burst

The gains to be had from property weren't lost on the Chinese. Newly wealthy Chinese households had few other investment options. Bank deposits pay miserable returns. Foreign shares are off limits, and the local stock market is volatile. So they went massively for bricks and mortar, buying second and third homes as investments. When built, these assets were often not even rented out, lest tenants detract from the much more important objective of maximising capital gains.

What followed was a property boom for the ages. During three years in the 2010s, China used more cement than America employed in the entire 20th century. The bubble was clearly getting out of hand. In 2020-2021, officials called time by imposing stricter caps on leverage. Property developers went to the wall, most famously including giant Evergrande, which imploded with $300 billion in liabilities. In 2023, Reuters estimated there were 7.2 million unsold homes. National property prices fell 40% between 2021 and 2025. That was devastating for a middle class that holds nearly 70% of its wealth in property. The property-shaped cloud over sentiment has yet to lift. In January and February, retail sales endured their weakest two-month start to any year since 2000 outside the Covid era.

There are plenty of other concerns for those looking to invest in China. The country's fertility rate is running at close to one child per woman, making it one of the world's most rapidly ageing societies. And a 2021 crackdown on tech firms (now largely reversed) was a reminder that all businesses ultimately operate at the pleasure of the Communist Party.

How China learnt from Japan's mistakes

Since the property bust, many economists have noted parallels between China and Japan. During the 1980s Japan was regarded as the world's most technologically advanced nation. Following the crash in the 1990s, its corporations slowly began to slip behind, failing to capitalise on the rise of the internet. But it looks as if China will avoid Japan's fate.

Tokyo spent the 1990s pouring money into zombie firms; in 2021, Beijing pulled credit from property and redirected it with military zeal towards the “New Productive Forces”, official jargon for things such as electric vehicles, rare earths, batteries, green technology and AI. Chinese companies are now conquering new global markets with terrifying efficiency. One in seven cars sold in the UK this year was Chinese, up from 1.3% just five years ago. Britain's top-selling car is currently the Jaecoo 7, a brand that almost nobody had heard of until recently.

China's critics have long pointed to what might euphemistically be called the country's relaxed attitude towards other nations' intellectual property. But China's days as a mere imitator of Western inventions are ending. As economics commentator Noah Smith notes on Substack, Chinese firms now know how to do things that Western companies simply can't replicate. Nowhere else has such a dense clustering of electronics and tooling engineers. Chinese firms are opening factories in other countries, and those factories are proving more productive than the foreign competition. Soon, the Germans will be copying the Chinese.

Better ideas are only one part of the equation. The other is lavish levels of state support, especially in the form of never-ending credit lines. Chinese factories are producing too much. The country's global export dominance – the trade surplus reached $1.2 trillion last year – is a symptom of the fact that there aren't enough domestic buyers to soak up a glut of batteries, solar panels and especially cars. China's manufacturers have turned to world markets not out of strength so much as desperation; razor-thin profit margins mean they are fighting to keep the lights on. China's industrial strength and its chronic deflation are thus two sides of the same industrial-policy coin. You might argue, as Smith does, that China is simply making a huge capital-incinerating mistake. But you might also argue, as Jeremy Warner does in The Telegraph, that given the choice between wasting capital on excess industrial capacity and wasting it on unsustainable welfare, as the West does, China is making the better strategic choice. Chinese industrial policy makes a lot more sense “if your objective is that of enfeebling the US... while insulating China against the sort of supply-chain vulnerabilities we see buffeting Western economies”.

Should you invest in China?

Will Chinese shares prove a good investment over the next ten to 20 years? Given the historical record of equity returns, the jury is still very much out. What does seem less likely today than even a few years ago is a repeat of the Russian experience, where foreign investments were effectively zeroed out following Vladimir Putin's invasion of Ukraine.

In 2022, the parallels with Chinese assets in the event of a Taiwan conflict seemed obvious. But the world has changed. It is far from clear that Donald Trump's America would stand in the way of a Chinese invasion across the Taiwan strait, and even harder to believe that the UK, acting in solidarity with the US, would cut off trade with China, the world's second-largest economy, as aggressively as we have sanctioned Russia, a comparative minnow.

Taking a one- to three-year view, the Middle Kingdom looks a reasonable bet. Firstly, because China's newfound coolness might just be a foretaste of a “vibe shift” about to occur in the market. Markets have always traded on narrative as much as cold, hard facts about Ebitda, and over the past decade, the rise of social media has only amplified this trend (how else can we explain car-maker Tesla's current price-to-earnings ratio of 324 times earnings?). Secondly, unlike Tesla's stock and its ilk, China has genuine value appeal. The MSCI China index trades on a very reasonable 11 times forward earnings, which should cap downside risks if anything goes wrong.

Punting the whole pension on Shanghai would be imprudent, but a trade that ticks both the momentum and value boxes deserves to be taken seriously. In 2026 the meme winds are blowing in favour of China. Given the entry price, it seems foolish not to lean into it.

The best ways to invest in China now

Before investing in China, it's worth auditing your current exposure. Enthusiastic buyers of emerging-market funds may well discover that they already have quite enough Chinese shares. As much as a quarter of many emerging-market trackers and funds are allocated to China. And for those nervous about conflict in the Taiwan strait, note that soaring semiconductor valuations have recently seen Taiwan's share of the emerging-market sector balloon, in some cases to another fifth or more of many funds.

By contrast, investors with a bias towards developed markets may be underweight China. China accounts for a mere 2.9% of the MSCI ACWI index (ranking behind the economic juggernaut that is Mark Carney's Canada). Compare that with China's 17% share of global GDP. There are sensible arguments for why Chinese markets shouldn't take up that much of a typical equity portfolio, but a 2.9% allocation is much too low for a country that is seizing the high ground in so many of the industries of the future.

The three leading active China trusts are Fidelity China Special Situations (LSE: FCSS), JPMorgan China Growth & Income (LSE: JCGI) and Baillie Gifford China Growth (LSE: BGCG). The funds have more similarities than differences, with each having put in a similar performance over the past 12 months, and a rising tech tide driving gains of about 25%. JPMorgan pays out a 4.7% dividend.

There is a solid case for active management in China, where Western investors will want to load up on tech and consumer shares, while steering clear of state-owned banks and low-quality firms. Fidelity has the best long-run record, but its slight tilt towards small and medium-sized firms may not be the best play at a time of relentless domestic deflation. Baillie Gifford, which has more of a growth bias, fits the bill better for those seeking a tactical momentum play.

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For the last decade, it has been easy – and highly profitable – to allocate the marginal pound in your portfolio to the largest American technology companies. However, it now looks as if the “easy money” has already been made in this trade and investors should consider where growth will come from over the next decade, not the last one.

For investors considering opportunities away from the US, Europe is beginning to step back into the spotlight. Contrary to popular belief, European stocks are not a legacy trade. Although the continent's large-cap indices lean heavily on traditional sectors, its small- and mid-cap segments – which comprise more than 2,000 companies – are awash with innovative businesses, which often command a dominant share of their sectors while being virtually unknown to most investors.

Three European stocks to consider

Our fund heads off the beaten track to identify European stocks that may be beyond the radar screens of larger funds and outside the reach of most analysts. Alongside a proprietary screening process, we travel around Europe on a weekly basis meeting management teams to assist us in building a high-conviction, concentrated portfolio of European stocks. Because we invest in smaller companies, we can build very deep relationships with them, engaging closely with management.

This part of the market has been through a challenging period in recent years, but the pandemic, the resurgence of inflation and the subsequent rise in interest rates have forced businesses to adapt, making European small-caps far more resilient than most people realise. With the market only just beginning to recognise the quality of these businesses, they may not remain small caps for long.

As the continent faces up to its need significantly to renew and strengthen its often creaking infrastructure, Netherlands-based Royal BAM Group (Amsterdam: BAMNB), a construction and infrastructure company, is well placed to profit. The group could be a major beneficiary of greater government spending on infrastructure in the coming years and it has a significant backlog of orders coming through its pipeline. The market has begun to recognise the quality of the company in recent years, but we believe it has further to run as infrastructure spending continues to gather pace across Europe.

AcadeMedia (Stockholm: ACAD) is a Swedish company that has broadened its geographic footprint across the Nordics and into Germany, providing early-years education. It is largely disconnected from macroeconomic shocks such as the oil price or US tariffs and enjoys a dominant position in its sector. The business is highly cash-generative and demand for its service in the future should remain robust. The stock is trading on an attractive price/earnings ratio of 11, making it an interesting long-term opportunity.

Einhell (Frankfurt: EIN), based in the Bavarian countryside, is a developer and manufacturer of DIY and power tools. The business led the way in developing battery-operated tools and is globally competitive on a cost basis, even against Chinese competitors. Einhell is starting to expand its reach across Europe and further afield.

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.

Another week brings another wild ride in the Middle East. Markets are still taking the swings far more calmly than almost anybody would have expected a few weeks ago. There's more volatility below the headlines when you look at which sectors are doing well or poorly, but the fact that global stocks are broadly unchanged since America and Israel first attacked Iran seems increasingly hard to understand.

One possibility is that investors remain optimistic that the crisis will pass and everything will go back to the way it was before. That is plausible, but becomes less likely the longer the disruption goes on. The second is that many people suspect that this is an inflexion point, geopolitically and economically, but feel that the long-term implications are still unclear. If so, it may be more sensible to do little and wait and see, rather than overreact wildly.

Brazil could prove to be a winner

So who, potentially, are the winners? The crisis will increase the focus on energy security, which should support commodity prices (short-term) and resource investment (medium-term). At a top-down level, maybe this will be good for Brazil. Yes, this is an economy with a long history of unfulfilled promises, but it is one that has done very well in previous resource booms.

Brazil's market is up strongly over the past year, but has not moved much in this crisis. On a forward price/earnings ratio of ten, it is not as cheap as it sounds (a cyclical economy should trade on low valuations), but it is not expensive. Brazil's economy is not immune to higher energy costs – diesel and fertiliser prices are rising – but very high use of biofuels should help insulate it to some extent. I am considering buying the Xtrackers MSCI Brazil ETF (LSE: XMBR).

What about the losers?

The crisis may accelerate the decline of the US dollar as the global reserve currency. The assumption is that this will be a gradual process given how embedded the dollar is in the global financial system – but we should remember that ruin often happens “gradually, then suddenly” in the words of one of Ernest Hemingway's characters.

Fewer foreign buyers for US Treasuries does not mean that America must go bankrupt – I do not think there is any likely way that America will default, other than stupid political theatrics around the nonsensical debt ceiling. However, the choices that it might one day have to make to avoid bankruptcy probably point either to much slower growth or higher inflation.

More broadly, it is hard to guess at this point what the implications are if the US dollar loses its unique status. A global financial system that no longer uses the dollar – and by extension many American companies – as the lynchpin of so many transactions could look very different. To take just one speculation, I hold Mastercard and Visa in my portfolio – I wonder how vulnerable they could be to potential efforts to decouple the world from America.

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.

What is stopping the UK from investing? It's a mixture of three main factors, according to Henry MacLeod, co-head of digital distribution at BlackRock.

In this episode of MoneyWeek Talks, Kalpana Fitzpatrick speaks to Henry about the state of investing in the UK, how we can debunk myths about risk, and whether AI can help you become a better investor.

Watch the full episode on our YouTube channel or 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.

Asian markets (excluding Japan) are still widely classed as “emerging markets”, but the description is misleading. China, South Korea and Taiwan now account for more than 75% of the MSCI Asia ex Japan index and more than 60% of the MSCI Emerging Markets. South Korea and Taiwan are high-tech economies by any standards. China is a more mixed picture, but highly advanced in many areas.

This means that Asia is a hard region to ignore. Four of the world's 30 largest firms are based there: Taiwan Semiconductor Manufacturing (TSMC); Korea's Samsung Electronics and SK Hynix; and China's Tencent. Crucially, these “fantastic four” are not just big companies, but also very well-placed. “The AI build-out is positive for Asia, with 38% of data-centre capital expenditure going to Asian businesses,” says Emily Whiting of JP Morgan.

In particular, TSMC is “one of the best businesses in the entire world”. While Nvidia and others design cutting-edge chips, it is TSMC that makes them. The market is growing strongly and chips are becoming almost a consumable, replaced every few years. That makes TSMC's forward price/earnings ratio in the high teens look almost like a bargain.

Meanwhile Samsung and SK Hynix dominate the market for memory chips, with Samsung trading on a single-digit forward multiple. SK Hynix's specialism in ultrafast, high-bandwidth memory commands a higher rating, but still only in the mid-teens.

Tencent is very different: it is mostly a domestic business, focused on entertainment, social media, the internet and gaming in China – ie, a consumption play. “Asia has 60% of the world's population and 48% of its GDP yet only accounts for 9% of the global stockmarket valuation,” says Whiting. “Demographic trends are strong, with over one billion people moving into the consumer class, to the benefit of the banking, financial and consumer sectors.”

Wider opportunities in Asian markets

This ensures that while nearly all the Asian specialist trusts have an exposure of more than 30% to the “fantastic four”, managers can find plenty to buy beyond the heavyweights. Look for value in Southeast Asia rather than China or Korea, suggests Abbas Barkhorder of Schroders. Return on equity in China has been “heading in the wrong direction since 2012 due to over-investment”, he argues.

India “remains expensive” among Asian markets, but offers some opportunities. The banking sector is attractive given “low banking penetration and private sector banks taking market share from state-owned ones”. Insurance also has scope for strong growth due to “low levels of insurance cover and a significant need for cover, given high out-of-pocket expenditure on healthcare”.

Recent performance of most of the Asia regional trusts has been very strong, led by Baillie Gifford's growth-focused Pacific Horizon (LSE: PHI) and Schroder Oriental Income (LSE: SOI). The market setback has knocked the region back by about 10%. This re-establishes absolute as well as relative value and provides an opportunity to invest for the long term.

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.

UK small-cap stocks haven't had an easy ride in recent years. With shifting interest rates and the outlook for the economy looking uncertain, many investors have gravitated towards the perceived safety of larger, more global companies instead. Look a little closer and a different picture emerges.

Across the UK small-cap market there are businesses continuing to grow steadily, strengthen their financial positions and build momentum. In many cases, this progress is being driven by long-term trends that are less dependent on the ups and downs of the wider economy. From infrastructure to healthcare and specialist services, these companies are benefiting from structural sources of demand that can support growth even in more challenging conditions.

The key is identifying those with the right foundations: scalable models, strong balance sheets and clear competitive advantages. The following three companies offer a good illustration of this.

Three UK small-cap stocks for your portfolio

Quartix Technologies (LSE: QTX) provides subscription-based vehicle-tracking systems that help small and medium-sized businesses monitor their fleets, then use that data to optimise routes and improve drivers' behaviour, helping to reduce costs and improve efficiency. The appeal for customers is that installation costs are quickly recouped through fuel savings and improved productivity, creating a clear and tangible return on investment. This supports strong customer retention as well as a dependable stream of recurring revenue.

With about 330,000 vehicles already connected to its platform and a growing international presence, Quartix has established a solid base, but there is still plenty of room for growth, especially outside the UK, where adoption remains relatively low. Its scalable, cloud-based platform and reputation for reliability and customer service give it an edge in a fragmented market.

Construction may not always seem like a predictable industry, but parts of the sector are underpinned by long-term government infrastructure spending, rather than short-term economic cycles. Galliford Try (LSE: GFRD) sits firmly in that camp, operating across areas such as schools, healthcare and water infrastructure.

Much of its work is tied to regulated, multi-year investment programmes, which provide strong visibility over future revenues and a steady project pipeline. In recent years, the firm has also become more selective in the work it takes on, helping smooth earnings and control risk. It has a strong balance sheet and is well placed to benefit from investment in public services.

Applied Nutrition (LSE: APN) is a UK-based sports nutrition and health company, which produces a range of wellness products, from protein powders to supplements. The business is vertically integrated, meaning that it makes the majority of its products in-house, giving it greater control over quality and costs.

Demand from health-conscious consumers is growing and the firm's ability to innovate and secure shelf space with key retailers has been an important driver of performance. The firm is well placed to build on this momentum, supported by a scalable model and exposure to a fast-growing market.

UK small-cap stocks are neglected, but that's often when the most interesting opportunities appear. Over time, small firms tend to grow faster than larger ones. Looking beyond the headlines and focusing on companies that are steadily improving can highlight opportunities others may be missing.

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.

Optimistic investors can find some reassurance in the latest edition of the Global Returns Yearbook, compiled annually for UBS by Elroy Dimson, Paul Marsh and Mike Staunton. Since the study has its origins in Triumph of the Optimists, a book they published in 2002, this is hardly surprising. In it, they chart the progress of the global economy and financial markets since 1900.

Since then, US equities have provided a compound annual return of 9.8%, compared with 4.6% for Treasury bonds, 3.5% for short-dated bills and inflation of 2.9%. This gives an annual real return of 6.6% for equities and 1.6% for bonds. Since 1960, emerging markets have outperformed, too, returning 10.9% annually against 9.6% for developed ones. The charts over time all stretch reassuringly from bottom left to top right. Setbacks, even in real terms, are overcome, and every peak is higher than the last, as is every low point.

“Inflation has an important impact on long-term returns,” the authors caution, with real returns highest when inflation is lowest, especially if economic growth is also higher. Gold “has been effective at beating inflation over the long term”, with the real gold price multiplying 5.2-fold since 1900 in real terms in dollars and 12.2 times in sterling. However, barring the bubble in the 1970s, almost totally unwound by 2000, it was a dud investment for the first 100 years.

Optimistic investors still have to tread carefully

Therein lies a problem with taking too much comfort from the data; long-term investors may think in terms of ten years, but nobody invests for 100 years. The FTSE 100 took more than 21 years to regain its millennium-eve peak of nearly 7,000; in the meantime, dividend income was earned, but inflation ate away at real values. Wall Street didn't regain its 1929 peak until 1954 and traded sideways from 1966-1982, as did UK equities. The Stock Trader's Almanac shows a pattern of markets struggling in periods of inflation (as in the 1960s and 1970s) and then roaring back as inflation fell.

This isn't the only problem. International investment is a relatively recent concept; for most of the 126 years, investors were largely confined to their domestic market. Exchange controls remained in place in the UK until 1979 and even “global” portfolios were normally 50% weighted to the UK until considerably later. The US, the Yearbook points out, accounts for 62% of the MSCI All Country World index, yet the US's share of developed markets' GDP peaked at around 62% in 1950. It is now 36% and slowly rising, as is China's at 23%. In 1900, the UK was the largest stock market, accounting for nearly a quarter of the world's total. New York, with 16%, was only just ahead of France, and Russia was just behind Germany at 9%. The Russian market disappeared in 1917 and again in 2022.

Historian Niall Ferguson has shown that World War I was neither predictable nor expected – it was a total shock to investors until Austria's ultimatum to Serbia. When war started, most bond and equity markets closed, some for years and some never to reopen. This, he argues, averted the greatest market crash of all time. Global investors have had to be nimble and country investors lucky.

Sector and stock selection have also mattered; getting stuck in the wrong stocks has been a disaster. “Of the US firms listed in 1900, some 80% by value was in industries that are small or extinct today, including railroads (most of the total), textiles, coal, iron and steel. Technology and healthcare, now half the market, were almost totally absent from stock markets in 1900.” Railways accounted for nearly half the UK stock market in 1900; its exposure to technology is still tiny.

Growth drives markets, not shocks

The lesson for optimistic investors is that you may be able to bury gold for 100 years, but you can't bury a stock portfolio. The market changes gradually, but those changes can accumulate and end up huge over time. Investors should fear an extended period of high inflation, of which there have been three since 1900, two associated with world wars. The very low inflation of a few years back is probably gone for good, but that does not make a return to the inflation of the late 1960s and 1970s likely.

The period since 1900 has been punctuated by geopolitical events, but as the Yearbook shows, “economic risk has proved more significant”. Market analyst Ed Yardeni endorses the point, showing that earnings growth and economic expansion drive markets, not geopolitical shocks. Media pundits have been surprised and disappointed by the limited impact of the latest Gulf war on equity and bond markets and claim that markets (ie, investors) have got it wrong.

Usually, though, markets are right and the pundits are wrong, so it makes more sense to ask why their analyses are flawed. This isn't difficult. Each unit of economic growth consumes only 30% of the energy of 50 years ago. Pundits like to claim that 20% of the world's oil passes through the Strait of Hormuz, but that includes oil bound for India and China, which is being let through. The Saudis have a major pipeline to the Red Sea and the pipeline from Iraq to the Mediterranean could be reopened.

Most importantly, a period of high rises will lead to a boom in exploration and production around the world. Oil and gas prices have probably peaked already and will fall sharply in the years to come. That the markets have been resilient on the downside and recovered sharply on any prospect of good news does not suggest that they are complacent, but that there is plenty of upside when an end to the conflict becomes visible.

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.

Vietnam is one of the world's fastest-growing markets, and this trend is expected to continue over the next decade. The economy is benefiting from growth in all three key components of GDP: rising exports as global firms diversify their supply chains from China; a major investment drive backed by both the government and the private sector; and the growth of consumer spending as the middle class expands.

At present, Vietnam is still classed as a frontier market rather than an emerging market. This distinction is about market infrastructure and access rules rather than the opportunities available – it is actually a larger and broader market than some countries that are already classed as emerging markets – but it limits how much exposure many foreign investors will have. However, FTSE Russell plans to reclassify Vietnam into the FTSE Emerging Market index in September 2026. This should mean that a range of new investors – both tracker funds and active funds benchmarked against it – will begin to put money into the market.

There are three UK-listed investment trusts that specialise in Vietnam. The largest is the £1.2 billion Vietnam Enterprise Investments (LSE: VEIL), followed by the £700 million VinaCapital Vietnam Opportunity Fund (LSE: VOF), and the £75 million Vietnam Holding (LSE: VNH). All of these trusts share a number of top holdings, which reflects the reality that emerging markets often have a limited number of large, higher-quality companies.

Vietnam's banks act as “amplified growth proxies”

All three have a lot in financials – for example, VEIL has around half. “Vietnam's economy is overwhelmingly bank-funded,” says Thao Ngo, who manages VEIL with Tuan Le. Bank credit accounts for around 145% of GDP due to underdeveloped bond and equity markets and credit growth runs at roughly two to 2.5 times the nominal GDP growth rate. “This leverage to GDP makes banks not just a proxy for growth, but an amplified proxy.” The sector enjoys a return on equity of 17%-18% compared with a regional average of 9%-11%.

VNH's portfolio is more concentrated than that of VEIL. It tilts more to mid-cap stocks than its peers, although at the end of 2025, it had around 75% in larger stocks “reflecting adaptation to market realities while maintaining conviction in Vietnam's structural story”, say the managers in the latest interim report. Their strategy focuses on high-growth companies geared to domestic consumption, industrialisation and urbanisation. The largest holding (at 10%) is Mobile World Investment Corp, which is also a major holding for VEIL and VOF. This grocery-to-electronics retailer and mobile-phone group plans to expand in Southeast Asia as well as growing further in Vietnam.

VOF looks for an extra edge in private markets. It has seven private holdings alongside 21 public investments (many of the latter were made before the firms listed). This builds exposure to sectors that are under-represented on public markets, such as consumer themes, technology and renewable energy. These are “developing quickly, but are still at a nascent stage to achieve maturity for listing”, says the fund, which is managed by Khanh Vu. For example, healthcare is an important area that is under-represented in public markets: the entire sector – comprised of one general hospital, a handful of generic drug manufacturers, and pharmacies – accounts for around 1% of the index. VOF has so far invested in three hospital platforms and successfully exited two.

At present, the three are trading on discounts to net asset value (NAV) of 15%, 7% and 23% respectively, which is broadly in line with their five-year averages. The Vietnamese market has been affected by the Middle East crisis, but the impact will hopefully be “cyclical and temporary rather than structural and permanent”, as VNH puts it. The long-term story remains the shift from low-cost exports to a higher-value economy with a growing middle 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.

Europe has lagged behind the US for years now, but what would it take for the continent to recover?

Daniel Avigad, manager of the TM Lansdowne European Special Situations fund, speaks to MoneyWeek's Andrew Van Sickle about opportunities in European equities, solving the continent's growth problem, and the consequences of populism.

You can watch the episode on our YouTube channel or subscribe to MoneyWeek Talks 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.

Legal & General Group (LSE: LGEN) is one of the oldest companies in the UK. It's also one of the few remaining that formed part of the FTSE 100 at the time of its inception. The group is known among investors as a slow-and-steady beast that pays a consistent, relatively high dividend yield, but hardly does anything to get the pulse racing. That is starting to change as Legal & General transitions towards an asset-light, higher-margin, faster-growth business.

Legal & General's longevity is down to its business model: life insurance and long-term savings. It is one of the largest retirement, life-insurance, and annuity providers in the country, operating under strict rules to ensure management runs the business prudently with a long-term mindset.

This means the business is relatively boring compared with other blue chips – boring, but not unprofitable. Legal & General throws off cash and has established itself as one of the UK's top income stocks, with a yield consistently in the high single digits.

Usually, such a high dividend would be a warning sign. Yields significantly higher than the market average usually indicate that investors believe the payout is unsustainable. In this case, however, the high yield and low valuation are more a reflection of the market misunderstanding the business model.

Legal & General is a dominant leader in the bulk-purchase annuity market and the largest provider of term life insurance in the UK. Both of these products are financially complex, involving multi-decade liabilities and, as a result, are heavily regulated.

There are strict rules governing how much capital the company must hold to meet its liabilities. Even for the most sophisticated financial analysts, determining how much revenue a bulk-annuity purchase or a term life-insurance product will generate over ten or 20 years is not straightforward.

You only need look at the firm's peers to understand this isn't a problem affecting only Legal & General. Chesnara, Standard Life (formerly Phoenix) and Just Group are all cheap and offer high yields. The problem is so bad that private-equity group Brookfield recently offered a 75% premium to buy Just. Standard Life has also decided to rename the company to focus on its more visible pension products, moving away from the old Phoenix brand, which was known as a closed-book consolidator.

This isn't just a problem in the UK. In the US, Brighthouse Financial (originally spun off from MetLife in 2017 to focus on retail life insurance) was acquired last year for a 55% premium. Athene was acquired by private-equity giant Apollo in 2022 for a 20% premium. Athene-backed Athora is in the process of acquiring the UK's Pension Insurance Corporation for £5.7 billion.

Jackson Financial, formerly the US arm of London-listed Prudential, spun off in 2021, has been so neglected that management has been able to acquire 40% of the outstanding shares in the past five years from cash flow as well as distributing a handsome dividend.

Times are changing, and so is Legal & General

Legal & General is becoming increasingly less reliant on its bulk-annuity, pension-buyout and life-insurance businesses. Instead, its asset-management and retail arms are driving an increasing share of profit. With £1.2 trillion of assets under management, Legal & General is one of the UK's largest investment-management firms.

It manages the funds attached to the defined-contribution (DC) pension schemes it manages, funds for international clients and a growing portfolio of private assets. Its private-market assets grew from £57 billion to £75 billion last year, which helped the overall fee margin on assets under management rise from 8.8 basis points to 9.1.

The group's workplace defined-contribution pension platform will be a key driver of growth going forward. According to the Pensions Policy Institute, the aggregate value of private-sector workplace assets could grow from around £1.2 trillion in 2025 to around £2.2 trillion in 2045, or £4.4 trillion in a best-case scenario. There will also be significant consolidation among the major players. By 2035, the market is projected to comprise only 15 to 20 large DC “mega-funds”, down from more than 60 providers today.

Legal & General's workplace DC assets under administration rose 21% to £114 billion in 2025. Net flows totalled just £6.2 billion. But management believes workplace saving is now the group's “core customer acquisition engine” and the group expects £40 billion to £50 billion in net flows by 2028. The group's retail arm includes annuities, lifetime mortgage and retail insurance products.

Other revenue streams also suggest the business is firing on all cylinders. In the institutional retirement arm, the group has flagged a contractual service margin (CSM) of £12.4 billion, up 2% year on year. This is the unearned income the group is forecasting it will generate from its book of annuities – equivalent to roughly 214p per share, net of tax.

Management announced a £1.2 billion share buyback alongside the company's 2025 results – the largest in the group's history – on top of a 2% dividend hike. Total cash returns this year will come in at £2.4 billion, with management saying it expects £5 billion of shareholder returns from 2025 to 2027, 35% of the company's market value.

Based on these projections, shares are trading at a total shareholder yield of 16.7% for 2026 and a historical price-to-earnings (p/e) ratio of 11.9, although this does not account for long-term profit-generation potential, as highlighted by the group's forecast CSM. Legal & General is continuing its transition to a cash-generative, asset-light business. Investors should take note.

Rupert Hargreaves owns shares in Legal & General

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.

Matthew Partridge: What prompted your book?

Ram Charan: I have been working in China for more than 20 years with American, European and Chinese companies; in some cases I was on boards as a director. The wake-up call was when I noticed that one US firm, which had a dominant position in the Chinese market, saw its market share begin to decline. Next, its unit costs went up and then the Chinese Communist Party basically forced them to sell their business to the Chinese.

This caused me to realise what China is trying to do – produce 90% of the global output in a sector, using a combination of subsidies, currency manipulation, and artificially cheap land and capital, and then using this to gain a cost advantage over the rest of the world. This strategy has already been applied to achieve a stranglehold over ten sectors in the past five years. This in turn creates a trade surplus, which is propelling China's military. It's a very sophisticated economic model, which essentially runs China as a conglomerate like General Electric.

The public may love it because it produces an endless supply of cheap goods. But in the longer run it means that non-Chinese companies cannot compete with China. And if war breaks out, this could become an existential issue.

MP: How likely is war between China and the US?

Ram Charan: We are already at war. The US House of Representatives Select Committee on China said it explicitly in October 2025: this is a war of mutual destruction; economic, technological, existential. The trigger will not be a single event. Cumulative economic strangulation will reach a breaking point. Xi has built something more powerful than an invasion: asymmetric chokehold capability. China can now shut down whole industries in America and Europe at will by controlling rare earths, battery components, semiconductor materials and advanced chemicals.

When Beijing announced requirements for export licences in October 2025, Donald Trump responded with 100% tariffs. The countdown has started. The real trigger is industrial collapse. When CEOs in the US realise they can't build anything without Chinese inputs, including defence systems, the political pressure for confrontation becomes unstoppable. Taiwan is the flashpoint everyone watches. But the invisible trigger is America losing the capacity to respond militarily because China controls the supply chains for defence manufacturing itself. China is stockpiling wheat, oil, commodities, and building the world's largest navy – 370 ships versus America's 290. It is expanding its nuclear arsenal to 1,000 warheads by 2030, and aligning with Russia and North Korea in a trilateral axis that can strike the US mainland in 30 minutes.

Xi Jinping is lighting proxy fires in Ukraine and the Middle East through local actors to stretch US military resources. Xi would prefer America to concede without firing a shot, but he is prepared to fight if the US does not yield. Unless America rebuilds industrial capacity fast enough to break China's chokehold, conflict is certain within the decade.

Matthew Partridge: What should the US do to combat the threat?

Ram Charan: Both the US public and firms must understand they are not competing with individual Chinese companies, but with the nation. And they can't compete alone. There must be more collaboration among both countries and firms. I have suggested that Trump create a Department of Manufacturing and Technology, whose full-time job is to co-ordinate, integrate and plan in a similar way to how the Pentagon organises the defence sector to fend off an equally powerful opponent.

Matthew Partridge: Didn't industrial policy fail when the UK tried it in the 1960s and 1970s? Witness British Leyland.

Ram Charan: British Leyland failed because bureaucrats picked products and ran factories. What I am advocating is government staying strategic, not operational. The Chips Act is an example. Government subsidises semiconductor making. Intel, TSMC, Samsung decide what to build and how to run operations. Government creates conditions for private companies to compete against state-subsidised Chinese opponents.

However, in addition to subsidies and support you will need enforcement of basic trade rules. Stop the dumping. Counter the currency manipulation that gives China a 20%, unbeatable pricing advantage. You also need to change US CEOs' psychology. They still think “cheaper currency, cheaper labour” is how you win. Move up the value chain. Import technology and equipment, not consumption goods. Scale up medium-sized manufacturers with AI and automation.

This is about national security. China has destroyed key US industries, including furniture, apparel, solar, rare-earth metals and ship components. The next targets are AI, biopharma, aerospace, advanced semiconductors, and chemicals. If those fall, America cannot defend itself. This is not industrial policy as socialism. This is industrial policy as survival.

Matthew Partridge: How can you ask other developed countries to work together under US leadership given that Trump has imposed high tariffs on them? Isn't that going to make them less likely to cooperate?

Ram Charan: I think people misunderstand Trump's approach. While it's true he has imposed tariffs, and this has created a lot of confusion, he has done this to rebalance trade between the US and the rest of the world, eliminating the large US trade deficit with most countries. Once this is achieved, his aim is to reduce these tariffs by as much as possible. Already small countries like Oman face barriers of as little as 2%. The idea is to bring countries to the table to discuss the issue, not protectionism for protectionism's sake. US tariffs will decline as the other sides reduce their barriers to US goods.

Matthew Partridge: You say that you are confident about the US because of the openness of its system and because of its big research infrastructure. But Trump has undermined this advantage with immigration controls and cuts to research budgets. Many of Trump's policies seem counterproductive.

Ram Charan: I agree that they are counterproductive. And that's honestly something I don't understand. Maybe it's due to his own ideological belief, but attacking universities is not consistent with his aim to reindustrialise the US.

Matthew Partridge: Moving from countries to companies, is it fair to say that investment in China is a double-edged sword? Many firms are being forced to give up their intellectual property (IP) in exchange for cheap labour and access to Chinese consumers.

Ram Charan: Yes, it is a double-edged sword. Not only will they steal your IP, but once a Chinese company shows signs of winning significant market share, Beijing will back it to the hilt, and give it a huge amount of resources to expand further, so it starts to drive you out of the market. The next thing, you notice you are making losses and decide to leave, or you get a call “inviting” you to sell up – as Starbucks and many others have done. Beijing's attitude, particularly in industries it has explicitly targeted, is that “until we get our own capability, you are our guest”– but once China starts to build its own domestic capacity, the Westerners are either asked to leave or driven out.

Some of the smarter companies started to work this out about ten years ago, and reconsidered their global strategy, including discreetly building up their operations in other countries, such as India. As a result, they are now doing very well, with their Chinese rivals still lagging behind due to the fact that they have not accumulated the necessary expertise that they would have gained from having a Western firm in their midst.

Matthew Partridge: What does India needs to do to become an attractive alternative to China for Western companies?

Ram Charan: In order to attract Western firms fleeing China, India needs to put its house in order. This includes smashing bureaucracy to make it easier for them to operate. India also needs to have better training in manufacturing, because manufacturing requires quality and reliability, and Indian firms have to learn to match customer specifications.

That said, India has some companies that are number one in the world. This includes Bajaj and TVS, which have done a great job of producing quality scooters, as well as other two-wheelers. So India needs to build on this to climb the value chain into products like semiconductors.

Matthew Partridge: Are there any other companies that stand to benefit from Western companies relocating from China?

Ram Charan: Every developed country will benefit from re-shoring to reduce dependence on China. Among developing countries, the other big winners will be Vietnam, Mexico and Indonesia. However, for companies, the solution is not substitution but diversification to break coercive power.

After all, Mexico and Vietnam are also proxies for Chinese production – Mexico's trade with China exploded after Trump's tariffs as Chinese companies set up Mexican operations to bypass US trade barriers. You must audit the entire supply chain. Where do the components come from? Who owns the factory? Where does the capital flow? Companies waiting for a single “China alternative” will wait forever.

Ram Charan has spent 30 years advising Fortune 500 CEOs on China. His latest book, China's 90% Model: China Has America by the Throat – Here's How to Fight Back and Win, is published by IdeaPress Publishing.

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.

One of the many unusual things about the Middle East crisis is that many markets still seem reluctant to treat it as a crisis. Take stocks. Yes, markets have fallen since 28 February, but still by far less than you'd expect given the scale of the conflict, the disruption to global energy supplies and the complete uncertainty about how long this may go on.

At the time of writing on Wednesday, the MSCI World index of developed markets is down by about 5.5% in sterling terms. The MSCI Emerging Markets is worse, down about 10%. This is not nothing, but it is considerably less than most investors would have expected in response to Iran closing the Strait of Hormuz.

Still, there is obviously some variation within this. The US continues to hold up better than most of the world (down 4%). Energy has rallied as you'd expect – the MSCI World Energy is up about 10%. Tech stocks have been fairly steady. Cyclicals such as consumer discretionary, materials and real estate have mostly done poorly.

Yet defensives such as consumer staples and healthcare have also been very weak, which is unusual at times of stress. This may partly reflect fears about input costs – many of which are affected by oil and gas prices – and the challenge of passing those on when incomes are under pressure, but it's not entirely easy to justify.

Little room for safe havens in the Middle East crisis

In fact, safe-haven trades in general are not really doing what you'd expect in the Middle East crisis. The US dollar is stronger against other currencies on average, but not by much. Gold has fallen by about 15% – very much at odds with its reputation. One popular explanation for gold's weakness is the prospect of higher interest rates – these are typically viewed as a headwind for gold, all else being equal. Another is that after such a strong run-up over the past year, investors – especially those with leverage – decided to dial down their risks by taking some profits.

Bonds have also been no sanctuary; they have fallen in response to the threat of higher rates. Yet even here, the story is not clear. Medium and longer-term bond yields are up – the 10-year gilt soared from 4.2% to over 5% – which sounds as if markets are pricing in higher inflation. Yet yields on inflation-linked bonds have marched in lockstep with conventional bonds, meaning that inflation expectations are unchanged (see above for US bonds, the UK is similar).

Can we make much sense of this? Maybe. There is some optimism that the Middle East crisis will not be too prolonged or stocks would be doing much worse. Still, markets are anticipating slower global growth, with the US coping better than the rest. They expect central banks to run tighter monetary policy in response to the threat of inflation, but the medium-term impact on inflation should be muted. There's a desire to reduce risk (hence profit taking in gold), but not to be too defensive because the last decade has shown that defensiveness doesn't pay. All told, it's plausible, but it is the best-case scenario. Doubts must rise if the war lasts much longer.

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.

The Fidelity Special Values investment trust employs a contrarian value-investment approach, focusing on unloved companies with the potential for positive change. We evaluate the downside protection of a company before considering its prospects over a period of between three and five years.

We seek opportunities across the breadth of UK stocks, although there is a structural bias towards mid- and small-cap companies, as this is an under-researched area where we find attractively valued stocks with good turnaround potential.

It can take time for a turnaround to materialise and investors to buy into the story. A diversified portfolio means we do not rely on the recovery of a specific holding. By building a portfolio of stocks in different stages of the recovery process, we hope to deliver outperformance across different market environments.

Three overlooked UK stocks

DCC (LSE: DCC), a UK stock which offers other companies energy, healthcare and technology services, is restructuring. It plans to focus mainly on energy, an area where it boasts a strong record of generating attractive returns on capital and growing through acquisitions. The firm fulfils our downside criteria, given that the shares are on a historically low valuation, while management is delivering substantial share buybacks, which are highly accretive to earnings power.

Market sentiment has been weak, largely owing to concerns around the structural decline of the group's fossil-fuel distribution business. However, we believe these fears are overdone and the substitution effect is likely to be slower than expected.

The highly consolidated nature of the industry enables established players to maintain strong margins and deliver attractive returns. Meanwhile, DCC continues to expand its renewable-energy activities, including solar installation and other energy-efficiency solutions. DCC's defensive characteristics – akin to those of utilities – and attractive valuation make it stand out as a compelling turnaround opportunity.

Best known for Sports Direct, Frasers Group (LSE: FRAS) also owns a broad portfolio of retail brands, such as Flannels, House of Fraser, Evans Cycle and USC. Its strength lies in its unique business model. Frasers Group leverages its scale and relationships with brands to acquire discounted stock in bulk from major labels (such as Nike and Adidas), supporting margins and profitability.

Unlike most retailers, it owns its retail sites rather than leasing them, providing it with a significant amount of backing from property assets. It also owns sizeable stakes in Hugo Boss, AO World, Asos and Mulberry, underpinning approximately 40% of its equity value and jointly implying that the core business trades on a very attractive low single-digit price/ earnings (p/e) ratio.

Standard Chartered (LSE: STAN) is an emerging market-focused bank that operates across Asia, Africa and the Middle East, providing retail, corporate and institutional services in some of the world's fastest-growing markets. Over the past decade, management has reduced the risk inherent in the business, streamlined operations and steadily advanced a turnaround strategy that is delivering tangible results.

The bank offers an opportunity to tap into strong emerging-market growth, which is a play on Asia's growing wealth. It is probably the fastest-growing regional wealth manager; this division generates about a third of the group's overall profits. Wealth managers are generally viewed as high-quality businesses, and tend to trade around 15 times earnings, whereas Standard Chartered trades like a bank on ten times earnings. Where the market's perception diverges from reality is where we see the opportunity.

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Sometimes it seems we are too hard on Rachel Reeves. Yes, she is a bad chancellor: anti-business with no coherent vision for getting the economy growing and no backbone when she is pushed by her party. On the other hand, it has been seven years since Britain had at least a semi-competent chancellor, and she has inherited a catastrophic mess that would be a gigantic challenge even for an outstanding one.

One might briefly feel that she deserves some support as an under-qualified person trying to do an impossible job at the head of a sclerotic Treasury that needs to be broken up and rebuilt. Then you look at her proposed changes for individual savings accounts (ISAs) and all sympathy goes right out the window.

A brief history of ISA rules

To see why these ISA rule changes are so misguided and why they show Reeves and her team to be truly clueless about investing, let’s go back to when ISAs were first launched back in 1999. The ISA rules then were much more restrictive.

You could pay up to £7,000 into a “Maxi Stocks & Shares ISA” each year, or up to £3,000 into a “Mini Stocks & Shares ISA”, up to £3,000 into a “Mini Cash ISA” and up to £1,000 into a little-used “Insurance ISA” that let you put money into with-profits funds from an insurance company (which in theory was supposed to be less volatile than investing directly in the stock market). You could transfer from a cash ISA to a stocks and shares ISA, but not the other way round. Interest on cash held in stocks and shares ISAs was taxed at 20%. Investments had to have a credible possibility of losing at least 5% of the capital. Bonds had to have at least five years remaining until maturity when they were purchased.

There were a few tweaks through the years before 2014 when then-chancellor George Osborne greatly improved the ISA rules: a higher annual limit of £15,000 could now be split between a cash ISA and a stock and shares ISA in whatever proportions you liked. Money could be freely transferred between both. Cash interest was no longer taxed in a stocks and shares ISA, and low-risk cash-like investments were allowed.

This was a huge step forward. Subsequent changes to ISA rules include flexibility, allowing you to take out money temporarily and put it back again without affecting your annual allowance. You can also now contribute to more than one ISA of each type each year. Today, the ISA is probably the best account of its kind in the world and has inspired similar products in other countries.

Set against this, new types of ISA added complexity. The Help to Buy ISA was a counterproductive attempt to solve the housing affordability crisis that is now a legacy zombie product. The Lifetime ISA's potential as a flexible retirement savings tool was weakened by overly tight age limits and by withdrawal penalties. The Innovative Finance ISA has been too niche for most investors. So further reforms were overdue.

What should happen is the merger of most types of ISAs to create a flexible general-purpose wrapper. All providers could choose what to offer in the wrapper – including cash, investments and innovative finance products – according to what kind of customers they wanted to serve. Lifetime ISAs would probably remain as a separate product with similar flexibility, but open to a wider age range, with fairer withdrawal rules and the ability to transfer in stranded Help to Buy ISAs.

Rachel Reeves's ISA rule changes would be a retrograde decision

Instead, Reeves and the Treasury came to believe that restricting the ability to hold cash would encourage more money to go into the UK stock market. So, unless there is a change of heart, ISAs will take a huge step backwards from April 2027.

Cash ISAs will have a lower annual contribution limit (£12,000 versus £20,000). You will be able to transfer from a cash ISA to a stocks and shares ISA, but not the other way. Cash-like investments such as money market funds will no longer be allowed in stocks and shares ISAs. Interest paid on cash held in stocks and shares ISAs will be taxed.

In other words, we are returning to many of the pre-2014 ISA rules. The degree of stupidity required to attempt this cannot be overstated. Whoever came up with this proposal does not appreciate what investors and savers need and has ignored all the clear benefits that previous reforms delivered.

MoneyWeek would be the first to agree that there is a problem with attitudes towards investing in Britain, but the current ISA rules have nothing to do with that. Quite the opposite: at present, you can put money into as many cash ISAs or stocks and shares ISAs as you like, transfer between them freely, and hold investments then move to cash in the same account if you are nervous about markets or you need to reduce risk. This flexibility is reassuring. Your money does not feel trapped.

Trying to coerce people to invest by restricting cash ISAs is not going to work. They will simply hold cash in taxable accounts instead rather than take risks they don’t want. Much more plausible reasons why people in the UK are unwilling to invest are i) regulators that have been far too keen to talk up the risks of mainstream investments while doing far too little to crack down on unregulated scams and ii) the ongoing national obsession with property.

Depressingly, Reeves’ other proposed ISA rule changes also include plans to end the Lifetime ISA and bring in a new Help to Buy ISA. Whether this will increasingly leave existing Lifetime ISAs as a zombie product, like the original Help to Buy ISA, remains to be seen. Regardless, it would clearly be another retrograde decision. And if the stock market remains moribund, it can only be a matter of time before the immensely idiotic idea of a “British ISA” limited to UK stocks – or, even worse, restricting international investments in all ISAs – also gets resurrected.

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Vietnam is one of the most exciting emerging markets, according to Dominic Scriven, founder and chairman of Dragon Capital.

In this podcast, he spoke to MoneyWeek's Cris Sholto Heaton about the challenges and opportunities that lie ahead for Vietnam, the current climate for investors and how his Vietnamese language lessons led to him founding the largest asset manager in the country.

Watch the full episode on our YouTube channel or tune in to MoneyWeek Talks on your preferred 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.

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Where are the safe-haven assets in a crisis? The answer has rarely been murkier. Gold is the usual place to wait out market shocks, but it has struggled for direction since US-Israeli strikes began on Iran on 28 February.

Gold's problem is that it had already risen 20% this year, leaving it “overextended” heading into the conflict, says James Mackintosh in The Wall Street Journal. That made it “an obvious asset to sell” for traders looking to raise quick cash.

“It's hard to overstate just how unusual” trading has been during this war. When stocks fall, gold and bonds usually rise. This time all three assets have fallen, a historical rarity. Where else to hide? “Defensive” stocks (think utilities and consumer staples) usually outperform at times of market stress, says Niket Nishant for Reuters.

Not this time. European consumer staples fell 4.5% last week, worse than the 3% drop on the wider Stoxx 600 index. Traditional safe-haven currencies haven't fared any better. The Swiss franc and the Japanese yen both sold off as bombs dropped on Tehran.

So far, the only traditional safe-haven asset to have done its job is the US dollar, up nearly 2% against a basket of other currencies over the past month. That reflects the fact that as an energy-exporter the US is less exposed to oil shocks, but even this comes with an asterisk. Investors are loading up on “short-term dollar cash” but want nothing to do with long-term dollar assets such as US Treasury bonds, which also slid.

Gilts – traditional safe-haven assets – have been clobbered

UK gilts “suffered their worst week” since the 2022 pension fund debacle, says the Financial Times. Two-year German bonds had their worst week since 2023. That reflects two risks. Firstly, that higher energy costs will raise inflation and delay interest-rate cuts. Pricing shows that traders now put only a 50-50 chance on one Bank of England quarter-point rate cut before the end of the year, compared with the two cuts expected a few weeks ago.

Secondly, concern that a serious energy shock could pressure the Treasury to spend “billions of pounds in new support measures”. While all bonds have sold off, gilts have recently been underperforming French, German and US government paper, partly because the UK is especially dependent on imported energy. When investors took fright in March 2020, they thronged into US Treasuries (and other sovereign bonds) to wait out Covid, says Matt Zeigler in Panoptica Money.

But since then, the hierarchy of “safety assets” has been “fundamentally reordered”. The decisive event was the removal of key Russian banks from the SWIFT banking system in 2022. Holders of “surplus capital” in Asia and the Gulf realised that what “happened to Russia could happen to them”. They are now choosing to forego dollar-denominated assets such as Treasuries when choosing where to stash their wealth.

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.