It’s been an eventful few weeks. In the last few hours while writing this, it seems a tenuous ceasefire has been agreed with Israel and Iran. After 10 days of tit for tat missile and rocket exchanges, the oil price surged by $10 a barrel, however, it started to drop almost immediately. The US got involved by bombing 3 nuclear sites but it seems it has limited its involvement to that one engagement. If this escalates it could have a large impact on world trade as Iran could effectively close the Strait of Hormuz which a large part of the world’s oil passes through. A rise in oil prices could affect inflation around the globe, just as world economies were starting to get a handle on it and bringing it down to more normal levels.
Hopefully this ceasefire will hold and calmer heads will prevail. Elsewhere the US still seems in trouble, with the tariff saga having no end in sight the American people seem to be holding off spending as retail sales growth has stalled, and this is before the full effect of tariffs has been priced into goods. More pain may still come. The dollar is expected to decline as the world loses faith in the US government which was once seen as stable and had very little corruption, if this happens inflation will creep up even higher and the waited for decrease in interest rates may never come.
In the UK inflation crept higher in April before easing a little in May, this is expected to be caused by the increased cost of employment due to the rise in employer’s national insurance. However, the UK is still undervalued and the FTSE 100 hit record highs over the last 3 weeks. The news seems to be very pessimistic but the actual markets seem very positive at the moment.
Interest rates held static June but a cut is expected in August. Even though inflation is higher than the Bank of England target of 2.0%, employment is trending downward with fewer working age people engaged in employment and house prices are slowing, still positive but lacking the strong growth we’ve seen in recent years.
Lower interest rates are priced into Chancellor Rachel Reeves future plans as lower interest rates mean a lower cost of borrowing for the government. She plans a lot of increased spending, mainly by increasing wages over and above inflation, even while saying that welfare for people with disabilities need reform. Having to spend more than she planned on borrowing would eat into her available funds and could mean raising taxes. Watch this space and we will find out one way or another in the Autumn for her annual budget.
Other Viewpoints
Cash
Interest rates have begun to decline following the Bank of England’s recent cut to 4.25%. Instant access savings rates remain around 4.5%, but fixed-term savings rates are slightly lower as banks anticipate further rate reductions. Analysts predict rates could drop to 3.25%-3.5% by the end of the year, with some forecasting as low as 2.75% in early 2026. However, you can currently get just over 4.4% on a 5-year fixed rate bond which, for those who have a low appetite for risk, would lock in these relatively high rates for the full 5 years.
Fixed Interests
With a potential recession in the US, not guaranteed but a lot more likely than 6 months ago, government bonds are becoming more in demand than corporate bonds. Newer released bonds are still looking like good value with higher rates still available and the potential for some growth as interest rates decline across the globe. I am expecting most bond funds to perform better over the next 3 years than they have over the last 3. They are also still a great hedge against falling equity markets, even though they fell at the same time as shares in 2022.
Alternatives
Gold continues to do well and is a very useful holding in a portfolio at present. As well as being a hedge against inflation, gold performs well when global tensions are high. With Russia/Ukraine showing no end in sight, the Middle East being particularly volatile, and the emboldening of China to potentially invade Taiwan (as Russia and Isreal have seen very few real backlashes against their foreign policy this is likely to move China closer rather than further away from military intervention) I can’t see gold falling heavily in the near future.
UK Shares
UK shares continue to remain undervalued, even though the FTSE 100 has seen record highs in the past few weeks. I think the UK will continue to perform well for the foreseeable future as the US stumbles.
I also think that the pessimism about the UK economy is vastly overblown. If you read certain papers (usually the right leaning ones) you’d think that anyone that ever earned any money is leaving the UK to sunnier (and lower taxation) climates. Nearly a third of the posts I read on LinkedIn are about that very topic, or ‘founders’ (just on a personal note I hate it when people who own a coffee hut, a PC Repair shop or any small business call themselves founders!) complaining about the high taxation environment we live. The reality is that the vast majority of taxation that the bulk of us pay is the same rate or lower than it was 5 years ago under the Conservatives. Yes, there are higher taxes or lower thresholds in things like Capital Gains Tax or Inheritance Tax, but as the vast majority of the population will never pay these taxes, I don’t expect it will have any impact on the growth of our GDP.
So, I’m currently very positive on UK shares.
US Shares
The US still has some the most ambitious growth stocks in the world and has the historical productivity growth to take advantage and continue to raise their profits well into the future. However, the US has a lot of things that are likely to negatively affect it going forward. Firstly, they are deporting the very people that work in low paid jobs but also pay tax and social security (even though they will never benefit from it) so cheap labour will be a thing of the past. If companies can’t get workers then wage growth is likely to explode upwards, which will have a huge impact on inflation. US Shares are currently very expensive compared to the rest of the world. Add to that the tariffs, which add costs onto everything imported, they have already started looking elsewhere to buy similar products. This means US corporations may see a large drop in profits.
I also believe that the pressure on US debt will mean the dollar will start losing value in the coming years, as other countries start using different currencies for trade, rather than the dollar. If the dollar falls then no matter how well their shares perform it will be difficult to outperform other assets under those circumstances.
European Shares
European shares, like the UK, are currently very good value. I also expect the Euro to rise as the dollar falls which will really help the values of Euro shares. Whilst I think the actual economies of the individual countries will be sluggish over the next few years, they represent a very good alternative to the US for both investment and sales.
Asian Shares
Shareholder reforms in Japan as well as a healthy dose of inflation could see the Japanese market grow, however, with low unemployment and high labour participation, there isn’t really the scope for any cyclical growth. China seems to be with productivity so things are less bad there, still not particularly good though, but there are some potential gold mines out there. India has a huge potential for growth and Taiwan continues to dominate in the semiconductor world.
Emerging Markets
As we know by now, emerging market economies are heavily linked to commodity prices, however, they are valued very cheaply at the moment so they may well be a slow burn investment choice for the very long term.