MARKET UPDATE
Our last newsletter was issued in November 2023, at which time we commented that we felt equity markets were attractively valued for medium to long term appreciation. We had not anticipated that we would be proven right so quickly, but in the last six months we have seen substantial rises in all of the major regions. This can be seen in the table below:
Europe +17.5%
United States +16.5%
UK +16.1%
Japan +12.5%
Asia +11.2%
The returns quoted are those which an investor could have achieved by investing in a low cost tracker fund or, in the case of Asia, the average fund investing in this sector (because no trackers are available).
This is obviously a very pleasing set of returns from markets, and the strong performance is reflected in client portfolios. Clearly portfolios are not entirely exposed to equities, and other asset types will dilute returns. This is deliberate, as they help to dilute returns when markets fall too, and in doing so help to contain volatility. Even allowing for this dilution, returns in portfolios have been pleasing.
ARTIFICIAL INTELLIGENCE
Returns in the initial part of the period were driven by the continued run of companies believed to be likely to benefit from the opportunities created by Artificial Intelligence (‘AI’). One such example is Nvidia, a company which historically provided computer chips originally targeted at graphic designers and computer games players. However, these chips have been found to be well suited to computers running AI, creating massively increased demand for its services. The share price has risen by 219% over the past year including gains of 82% in the last six months alone.
Initially, it was believed that it would be technology companies who were the beneficiaries of AI, leading to references to the ‘Magnificent 7’, the seven largest tech companies which had seen substantial growth. More recently we have seen some of these companies give back part of the earlier growth, leading to speculation that values may have risen too far and too quickly.
There will be many other businesses that benefit from AI though, and not just technology companies. In time, AI could transform almost every business. Healthcare is often quoted as a principle beneficiary, because AI can analyse medical images and data to assist in diagnosing diseases, predicting patient outcomes and create personalised medicines based on genetic makeup and individual health situations. However, other industries could benefit too, including:
> Finance (to help detect fraud);
> Retail (through inventory management);
> Transport (through self driving vehicles);
> Farming (using sensor and drones to optimise planting, watering, and harvesting).
These are just some of the many examples.
The potential of AI is being compared to the arrival of the mainstream internet in 1999. We believe this offers exciting investment opportunities as well as presenting social changes.
Which companies are poised to benefit the most, and which are at risk of being overtaken, is not yet known, but the technology has the potential to lift both markets and economies to a new level.
CORPORATE BONDS
In the early part of this decade we commented on the challenges facing corporate and government bonds. These are loans to companies and countries to finance their spending needs, with the capital being repaid on a fixed future date with a known level of interest.
Back in 2020 interest rates were just 0.25% per annum for loans to the UK government, with the rate fixed for ten years. The poor value these represented was arguably self-evident, but the risk to capital was not. In the period from the end of 2020 to the end of 2023 capital values fell substantially as interest rates rose.
We have long been underweight in bond exposure, and our clients were generally significantly under weighted in this area. Prices have now returned to more sensible levels, and if interest rates do fall later this year, as is widely expected, bonds purchased now could provide competitive risk adjusted returns over the medium term.
This more favourable risk reward is something we are already addressing during our review process, and increasing exposure will help to further diversify portfolios and moderate volatility.
REMINDER – ONGOING ADVISORY SERVICE
Did you know that by subscribing to the Ongoing Advisory Service:
- You have access to the Michael Ambrose Limited online valuation portfolio as part of the service. This provides access to the latest valuations and detailed information about the funds being held.
- Your investments are monitored for consistency and performance. We regularly analyse and research our Core Investment Panel. This means that we will inform you should we become concerned about a particular fund or fund manager in between annual review meetings. If you do not hear from us in between review meetings that is because there are no pressing issues to be concerned about.
- If you have investments in funds that are not on our Core Investment Panel, these investments will be reviewed at annual reviews.
- You should feel free to contact us to discuss your portfolio or financial situation in between annual review meetings should you need or want to. The point being is that you do not need to wait for your annual review meeting to raise any issues or queries or indeed seek further advice.
If you would like to know anything further in relation to the Ongoing Advisory Service, please contact your usual adviser.
FINAL NOTE
The purpose of this newsletter is to provide a commentary for general interest purposes. It is not intended to provide recommendations, or to provide a deep technical analysis. If you would like more detailed information, or have any questions regarding your individual portfolio, then please speak to your usual adviser. Thank you.