 More bad news is good news this week for the UK, with unemployment higher again, amid growing tales of people being replaced by AI. But it certainly isn’t all about AI. As a co-founder of Gail’s put it this week – in his 40 years of business experience the mood of UK employers is the “darkest” he has ever known. Lots of factors have played a role – rising minimum wages and AI, new and higher taxes, lack of confidence in political leadership. It certainly isn’t all about domestic issues. Trump has singlehandedly unravelled certainties established in the last 50 years. Uncertainty and lack of visibility will deter businesses of all shapes and sizes from investing and recruiting.
Yet with UK inflation heading down, this is precisely the environment which merits sharper than expected UK interest rate cuts, and the talk this week was again of 2.75% base rates within a year. This is a major reason why the UK stock market continued to outperform in the last week. The FTSE 100 was up 2.6%, the world’s best performer, while the US struggled, down 0.6%.
The UK is undoubtedly cheap, but the better opportunities are in the small and medium sized companies, not the FTSE 100. As momentum in favour of the UK builds (fingers crossed), we should observe consistent outperformance from the UK indices lower down the pecking order. For fund selections, use the Best Funds By Sector tool, and compare the current winning funds across the three sectors, UK All, UK Equity Income, and UK Smaller. Do remember that the choices across these sectors make up our Dynamic UK Blended Portfolio.
The obvious trip wires are politics and reforms domestically, while overseas the focus is Trump, the US markets, and war.
The UK desperately needs reform across a wide range. But this is highly unlikely without a change of Chancellor combined with another U-turn or three, or a General Election following disastrous local elections. It’s anyone’s guess. And we must be careful what we wish for.
Trump is mentally unstable, so that is a big wild card. That leaves the hugely vulnerable US financial markets and war risk.
If the US is intent on starting a war with Iran, they probably won’t have themselves in a position to do so until mid-March. It is fair to say, as one analyst did this week, that the vast majority of wars do not impact financial markets after a 1-2 month wobble (the exceptions being the two World Wars). When markets dip initially it is typically a good opportunity to buy. Sadly we will probably have to return to this issue.
On US markets vulnerability, using basic wave analysis on the S&P 500, nothing has changed from what I have been saying for weeks. Support for the S&P is around 6400, and a fall to this level will be the correction (the wave 4 in Elliott terms) before the rally to a grand finale. Perhaps war with Iran will be the trigger?
If that US-centred correction is confined to March/April it sets up all markets for a humdinger into the Summer. At the moment the Trump’s Republicans are set to be obliterated in the November Mid Term elections. By the Spring Trump will be in panic mode, so expect extreme stimulus to fuel the last nutty leg of this 40 year bull market.
Returning to AI, you might have already noticed that companies which sell “knowledge”, from data to consultancy, have been smashed over the last year, whether UK small companies or US giants such as FactSet and Accenture. Why? Because AI appears to make knowledge free. Even within these companies, it is very difficult for them to gauge the next hit from AI, so two things are happening. Sack higher paid middle managers, and don’t recruit. Don’t buy our own shares (CEOs typically would) because we have little to no idea what will happen next.
This is why investors are increasingly drawn to assets they can “touch”, and sectors where positive trends are clear e.g. those of a Value-style, where funds of this nature can be found in our recent list.
In commodities, gold and silver appear to be about mid-way through their sharp corrections – if this is a significant correction it will only be over when investor sentiment is measurably poor, and we are nowhere near close to that. In contrast, uranium is in a good place, and as we said back in November “interest is subdued at best…there is a clear swell in long term demand, and a “quiet erosion of expected supply””. Uranium hasn’t suffered the extreme volatility of gold and silver because it is an energy play – nuclear energy.
On 28th November we headlined “Oil or Gold?” and continued:
“Oil is the one which most of you would not have expected to see featured. Yet that is exactly what happens at big turning points – total lack of interest, even the view that it is uninvestable. It is fashionable to be negative about oil. Yet inventories are falling relative to seasonal requirements, while demand continues to trend higher.”
Since then gold has been extremely volatile, and oil and energy funds have continued to make steady progress.
As you can see, opportunities persist despite the negativity and entrenched gloom.
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