What's on investors' minds? Five things to think about

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Please refer to the glossary at the end of the document.

Given everything that is going on, the question of what’s on investors’ minds right now is a difficult one to answer succinctly. Here I will cover five key area of importance, to my mind, anyway, as briefly as I can. Some are economic, some focused on financial markets, but they are all interrelated.

Trumpenomics

After the President was sworn in at the start of January we’ve continued to see a flurry of executive orders and policy measures. The ones that most people have been waiting for relate to trade tariffs and the desire to rebalance trade – in other words, how much the US imports from and exports to different counterparties. The aim is to have that in balance by increasing tariffs on countries (or industries) where the US imports much more than it exports.

The main focus has been on Mexico, Canada and China. The first two of those are not in a strong position to resist and the President is likely to get his way. China is a different story. First of all, the deep-seated political distrust, probably dislike, between the two countries is an issue, but also, China is the second largest economy in the world, a huge exporter of all types of products and an enormous consumer of many US products. This is the big one! The EU and UK are also in the spotlight, with the EU being another main target.

The questions are; does this all really matter? Will it have any impact on me? Isn’t this all just noise and bluster? Answers; yes, yes and no. If tariffs are imposed to any significant degree, it means prices of goods will rise. Inflation is a likely outcome and global trade will suffer. Is it noise and bluster? Whatever your view of the President is, he is putting the US first in words and actions and that has ramifications for the rest of us, particularly when economic growth is hard to come by. More on that below.

The first cut is the deepest

If you look at the economic growth forecasts for the world overall and different regions within it, it is difficult to get too excited. The US is doing well and should get a boost from Trump policies. The Eurozone is struggling. The UK is worse than that. China is not meeting expectations, despite huge stimulus being provided by the authorities. India, now a very large economy, is not one that can drive global growth, whilst Japan hasn’t sparked into life. If the constituent parts aren’t doing well, the whole can’t do so either.

However …... there are ways of doing something about it. Governments can provide support through tax cuts and / or spending. The problem is not many governments have the wherewithal to do so. Or central banks can cut interest rates. The second option is happening to a point.

The chart shows interest rates in the US, UK and Eurozone since the end of 2020. As you can see, they were around zero through 2021 as we recovered from COVID, before rising steeply as the battle was fought against inflation. But they haven’t come down that much. At home, following the Bank of England’s (BoE) announcement on 5 February, the base rate is now 4.5%, down from a peak of 5.25%. The US is also 4.5%, down from 5.5%, but the Eurozone rate has fallen the most, from 4.0% to 2.75%.

US, UK & Eurozone interest rates 31.12.2020 – 07.02.2025

Source: Bloomberg; US Federal Reserve bank target rate upper bound, Bank of England base rate, European Central Bank deposit rate.

The point I am making here is that there is plenty of room for rates to fall further if needed, but the central banks fear inflation, which hasn’t gone away in the US or UK and, as I said many times as interest rates went up, it takes time for the impact of a change to work through, although cuts are likely to work through faster than increases, thus stimulating economic growth.

Stagflation: a word that strikes fear

Definition from the Oxford Languages dictionary:

Stagflation; persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

When the BoE announced the interest rate cut, it also told us that it expected the UK economy to grow at 0.75% this year. That’s half of what it forecast in November, just three months ago. It expects inflation to rise to 3.7% before slowly heading back towards the 2% target rate. This outcome would be likely to lead to higher unemployment. Given the economy is probably not growing at all at the moment, the risk of stagflation is a real one.

So, what can be done about it? As mentioned above, government tax policy and spending plans can help, but the tax burden is rising and, as we heard in the Chancellor’s recent speech on kickstarting the economy, investment plans vary from being rewarding in the long term to very long term, not the short or medium term. The BoE can help by cutting interest rates. Indeed, at its meeting last week, seven members of the Monetary Policy Committee voted for a 0.25% cut, whilst two voted for a jumbo 0.5% cut, so there are signs they are live to the problem.

It's not all bad news, though, partly because Sterling fell, which benefits large companies with significant revenues from abroad, and the FTSE 100 Index hit a record high!

Is it too good to be true?

The world of Artificial Intelligence (AI) was rocked last month by news that a Chinese group, DeepSeek, had a free to use AI product that threatened all the existing offerings and the companies that have been doing so well since the industry exploded into reality. Those within the AI industry were well aware of DeepSeek, but its sudden emergence into the outside world sent share prices of the very largest companies in the world into a tailspin, with others, beneficiaries, moving sharply higher.

It is very difficult to know the eventual outcome, but I think it is appropriate to apply some scepticism to the idea that a product coming out of China that hardly anyone has heard of has become the world leader overnight and threatens the status quo of an enormous, albeit relatively new, industry.

However, given the sharp downward share price moves we saw in companies like Nvidia, Broadcom and many others that have benefitted from the growth in AI, I think some scepticism is appropriate there as well.

Volatile markets are to be embraced, not feared

That statement is true – up to a point, anyway. Clearly huge downward moves in equity markets such as those we saw in the global financial crisis in 2008 and the bursting of the DotCom bubble in 2000 are a problem. They can take years to recover from. Similarly, it is hard to see bond markets coming back to where they were in 2020 / 2021, before rising inflation and higher interest rates came back on the scene.

However, many factors drive the prices of different asset classes, including economic ones, business conditions and valuations (how expensive or cheap an asset is, compared to history and peers). These can lead to sharp moves in prices which can often be short term. An extreme example of that was happening five years ago through COVID. This chart shows the MSCI World Index, which is a good way of looking at all the world’s equity markets, from the end of 2018 to today. It fell over 35% in about 5 weeks during February / March 2020, but recovered by the end of August. I know it was painful at the time, but it provided amazing opportunities to buy good companies at very attractive valuations.

MSCI World Index

Source: Bloomberg, 26.12.2018 – 07.02.2025. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

Over the years financial markets have become more sensitive to changing conditions and news flow, partly because information is now available immediately all around the world, but also partly because computer generated systematic trading is now prevalent. My point is simple: long term investors can take advantage of short term price moves as long as they accept that the recovery may not be quick and they are prepared and able to wait for the recovery.

At the moment, in my view, there is a good example of the opposite of this happening. There are a small number of giant US companies that have driven equity markets higher as their share prices have shot up to levels that make them look much more expensive than the rest of the market. Not being invested in those companies has meant portfolios have, typically, performed less well than those that were invested. I think we are now at the point where actually being invested in those companies is the risk. Of course they are all different and their share prices will perform differently, but what happened to Nvidia and Broadcom on the news about DeepSeek shows what can happen. FOMO (Fear Of Missing Out) could be replaced by ROBI (Regret Of Being In).

The last word

There is so much going on in the global economy, politically and in financial markets at the moment that it is very important to focus on the long term, as that is what we are investing for. It is easy to get distracted and persuaded by shorter term factors. If you do make investment decisions on that basis as opportunities do appear, they need to be conscious ones.

It is worth saying that, as fund managers, we get access to all sorts of information, data, analysis, commentaries and meetings with experts. These are not available to individual investors. Investing directly in company shares, for example, can be risky and diversifying that risk across a range of investments is important. Having live access to markets and the information to hand is crucial in making such decisions.

Glossary

Bonds (or fixed income)

Types of investments that allow investors to loan money to governments and companies, usually in return for a regular fixed level of interest until the bond’s maturity date, plus the return of the original value of the bond at the maturity date. The price of bonds will vary, and the investment terms of bonds will also vary.