SpaceX on Launchpad While Bonds Dampen Risk Sentiment

Ajouté : 2026-05-20

[00:00:07]Welcome to IG's award-winning podcast, The Art of Investing, with me, Rich McDonald. And I've got my co-host here, my Bon Supreo, Chris CJ Fillingham.

[00:00:16]>> Hey, Rich. And my equities expert. It is Mark Holden.

[00:00:20]>> Hey, mate. Now, some fantastic comments on the YouTube this week. and one of them in particular really highlighting how much his wife enjoyed the spice market update. So, let's not hold back any further. Let's go straight to the star of the show.

[00:00:35]>> Oh, no pressure then.

[00:00:37]>> Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in.

[00:00:44]This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. Uh right. So markets this week have continued to be sort of dogged by the poor inflation data we had out the US at the end of last week. The CPI and PPI, if you remember, we talked about that being worse than expected.

[00:01:02]And Donald Trump has been ratcheting up the threats uh over the weekend. Uh and of course this is a short week for us.

[00:01:08]We're recording this on a Tuesday. The update will be relatively sort of muted in that sense.

[00:01:12]>> CJ's getting his hair done on Thursday.

[00:01:14]>> He had it done, didn't he? Which one?

[00:01:18]So the sort of headline as I mentioned obviously the ceasefire sort of threatened to come to an end has seen the Brent uh oil futures for December.

[00:01:28]So that's the the price for Brent oil in December hit a new high new sort of post Ukraine high at $91.5. Now to give you some perspective that a week ago that was 86.5 and a month ago was $80. So actually the curve is saying that the price is going to stay higher for longer and that's that's given a bit of a wobble in some of the equity markets.

[00:01:48]We've had no new all-time highs this week which uh it's been a while since I've been able to say to say that unfortunately >> you've had some alltime highs but not alltime highs in in the bond market.

[00:01:58]>> In bond markets in years but you'll get there in a second.

[00:02:00]>> Prices going down. Exactly.

[00:02:02]>> And in our cash allocation there as well.

[00:02:04]>> Yeah. Yeah. Hey. So, even though Friday was the biggest one-day fall uh we've seen since March, uh nevertheless, the S&P and the NASDAQ made it seven up weeks in a row. Now, they started this week down and Friday was a pretty tough day. Uh but nevertheless, it's been the longest run of sort of continuous one week up, another week up, another week up since November 2024. As I say, no alltime highs though. Um, and mainly because bonds have had an awful time.

[00:02:32]And I'm sure Chris will sort of expand on this, but basically 30-year bonds in the US have hit a high not seen since 2007 at sort of 5.17% yield. Uh, that's for 30 years. Uh, in Japan, they had very strong GDP data overnight. That was good in terms of good for the economy, but then the markets thought that that would mean an extra rate rise in in Japan. And so their yields rose to the highest they've been since 1997.

[00:03:02]>> Wow.

[00:03:03]>> And here in Europe, the German yields hit uh the high since the highest since 2011 and the UK since 2008. So it's been a bit of a bloodbath in bonds actually.

[00:03:14]Um, I don't know if you want to talk about it now, Chris, or >> It would seem to me that we we we that we we called it at the end of last week and now people are starting to uh starting to react. I suppose the only thing that I would say is actually go a little bit against it in that um I'm always a bit worried as people know on listening to the podcast that when you read it in the newspapers, things are starting to get a bit in there and in people's minds and expectations and probably you should be looking to go the other way. Well, in today's FT front page, investors warn of correction risk as high-flying stocks defy bond gloom.

[00:03:46]Now, obviously, they were listening to our podcast on Thursday and wrote that article, which I'm very grateful. Thank you very much. Didn't get any, uh, patent or or any credit for it. But at the end of the day, um, if people are starting to talk about that, and there's a number of people mentioned there, you know, you're probably not going to think this is the start of a big correction.

[00:04:07]It certainly can be a start of a correction, which is why we sold some stock on on on Friday. But, you know, if people are thinking that already, then this has probably not got too much in in in terms of where to go. But we should just be mindful that bond yields are rising and rising quickly.

[00:04:21]>> I've been asked if you started the bond market turmoil with your comments last week.

[00:04:25]>> I I wouldn't like to claim credit having stopped doing bonds about 10 years ago, but uh I I was a big player then.

[00:04:31]Perhaps people are listening, Rich. You never know. You never know.

[00:04:34]>> I was kind of a big deal.

[00:04:35]>> Yeah.

[00:04:37]way back when.

[00:04:39]>> Let's crack on to the company news.

[00:04:41]Basically, we're coming to the end of the reporting season and it's been a very good reporting season pretty much every in the world, but particularly in the US and in Asia. In the UK this week, we had uh Staden Chartered have their results out. Shares didn't really move a lot, but I I bring it up because they mentioned they're going to cut about 8,000 back office jobs because of AI.

[00:04:59]But this is a quote from the CEO, which I thought was quite appalling actually.

[00:05:03]He said it's not cost cutting. It's replacing some cases lower value human capital with the financial capital and the investment capital we are putting in WTF. I mean really do you want to go and work at Stand Uncharted with the CEO spouting that stuff? God I mean yeah it's pretty appalling in my view.

[00:05:22]Anyway, hey ho rant over moving on. I do who's uh who is in China is basically the Google of China uh had really good results this week and the shares are up nicely. Um and they're again a bit like uh Alphabet we saw who own Google in America. They're seeing good strong growth from the AI businesses and cloud businesses and actually um the old world advertising is doing okay as well. It's not too bad. So all in all good results from them. Uh and later this week we're going to get here from Walmart who are the biggest retailer in the world. So a lot of people will be looking at that to see how uh how they they're doing and they appeal to more of the lower end of the economy. So, you know, we've had some worries like Shake Shack last week sort of having disappointing results.

[00:06:04]So, people look carefully at Walmart to see whether the low-end consumers are struggling still. Um, but yeah, this it'll be a big set of numbers. The other number that's really important to remember is tomorrow night, well to the night tonight when this podcast comes out. So, this will come out on Wednesday at 9:00 p.m. tonight, Wednesday night, Nvidia will have their results. Uh and I think that a lot of people are looking there's a benchmark that's being touted around if they can get their data center revenues to up to over a trillion dollars which they've guided to then that will be seen as a very good achievement. Um and the shares have been performing pretty well in the last few weeks in the runup term.

[00:06:43]>> I mean they haven't missed numbers in about two and a half years now at least.

[00:06:46]>> So that's nailed on I would say >> I think you know they they're very good at managing expectations and we've talked about this before. The American companies are much better at managing expectations. So they can beat their shares go up. They own lots of share options. They happy days. They make many multi-millionaires as they do in America. Sadly it doesn't happen over here in Europe. Um says me very jealously.

[00:07:08]The other thing I wanted to point out and we've mentioned a few times SpaceX or sorry SpaceX.

[00:07:13]>> I know we're keeping it as SpaceX.

[00:07:16]So the rumor is a very strong rumor that they are going to their their IPO uh filing which gives them permission to float on the stock exchange is due to be released today or tomorrow or the next day sometime this week. Uh and it seems they're going to be trying to raise $75 billion which is the biggest fund raise in history. Um and you know some very the some of the very biggest names have already put their hands on and saying we're going to buy those. Black Rockck CJ's ex employer have put in they said they're going to buy between five and 10 billion dollars worth of that that flotation and they already own some because they own some in their private markets. So, you know, they already put in has them say want more. Um, so if it all goes ahead according to that, they're going to do marketing. And then when companies raise money, they go around and see the big institutional shareholders and sit down with the chief exe, the finance director, and the the big fund managers, and they talk about, you know, their plans for the business and how it's all going. And that's called that that's called marketing before you actually do the IPO. You then put your allocate, you know, what you want to get out of the the allocation from the the flotation. And then they should start trading all things going right after pricing on the 11th of June.

[00:08:26]So only in a couple of weeks time they should price it. They should start trading on the 12th of June. So just something to keep an eye on in the background. Uh and Elon Musk has said basically he's not selling any of his existing stake. So he's so confident the shares are going to go up even more.

[00:08:40]>> And of course this is on a week after Cerebrris came to market. So it is a chip maker. But the difference with the Cerebrus trips is that of course we spoke about Micron last week and this DRAM getting more and more expensive, the memory that is going to be used in the data stack. Now Cerebrris takes the memory and builds it into the chip.

[00:08:58]That's one of the big USPS that they've got versus Nvidia. So it'll be interesting to see how they've done. But yes, the biggest IPO of the year so far and only the 100% gain on day one. So, originally priced at $185. Cerebras opened at 350 and the next print was 385 before dropping 30% in the next 24 hours. Was that the top of the NASDAQ?

[00:09:25]Because that was the exact point that we saw the highest ever print in the NASDAQ and we haven't seen it since 4 days later.

[00:09:32]>> You have little faith. I if there is a chance it could be when SpaceX comes.

[00:09:36]You never know. But uh I don't think you know until SpaceX comes and that that could generate a lot of interest. We'll see. We'll see. And elsewhere really sort of uh Trump obviously met with China with President Z. Uh it was a bit of a damp squib really. They all came back saying it was a great meetings and you know everything was hunky dory and awesome you know in true American style.

[00:09:55]Basically all they've done is reset their agricultural goods sort of trade deal that they had before. Um and they basically the US have said that Nvidia can now sell their chips into China.

[00:10:05]China are not saying, "Okay, to Chinese companies, you can go and buy Nvidia chips." They want them to buy their own Chinese chips, which is an interesting move. So, there was some of the steam that was going into Nvidia's share price in the run-up to those meetings has come out a little bit in the last couple of days. And that's maybe one of the reasons the markets come back a bit along with those high bond yields, those rising bond yields we've seen. But there's been some other deals that are sort of not d not sort of directly necessarily associated with AI, but are also linked in some ways. So there's there's a massive takeover by a company called Next Era Energy in America.

[00:10:37]They're taking over a company called uh Dominion Resources. This is a basically utilities getting together. The Dominion Resources actually basically supply a lot of electricity to the big data centers particularly in V Virginia which is where most of the um the data centers are being built in America around Virginia. Um and they're paying $67 billion for it. So this combined utility will be be the biggest in the world at $250 billion. uh it's pretty punchy just to supply mainly sort of power to the these data centers. There's already 3% of US electrical demand goes into data centers and that's expected to rise to between sort of low to low teens sort of 12 13% in the next 3 years. So they're lining themselves up ready for that no doubt. Interestingly Ford obviously the car maker which you would never think would be involved in these sort of things um have had a done a deal with EDF. You know, many of you will have EDF energy in your, you know, on your utility bills, getting your electricity and gas. Well, Ford have done a deal with them where they're going to build them a huge uh battery energy storage site. So, they're going to they're going to basically build these massive batteries that so if data centers go down, there's a backup there effectively. Uh quite interesting that an old style company like Ford making cars are also moving into this battery technology. In the data front, we've had u we've had very good uh quart first quarter GDP in Japan and one of the reasons we like Japan is obviously that we're expecting growth to pick up there.

[00:12:05]They made half% growth in the first quarter uh and that was forecast to be 0.4 and that's risen to 2.1% now for the year which is is first time it's been get above 2% for a while and it shows you their policies are beginning to work. However, the bond market, as I mentioned earlier, took a little bit of fright from that. So, where growth is so good, we need to perhaps bring interest rate rises forward in in Japan. Uh, and that that's all those those bond yields rise to the highest level since 1997. As I mentioned early on, >> sounds like a good opportunity to to hear from our bond expert. What what are you thinking of these moves, CJ?

[00:12:38]>> This is more of what we were talking about at the end of last week. You'll be familiar on this podcast with me talking about forward rates, but let's just have another little example of that. 10ear rates in the US that are are around about 4.7% at the moment. 10 year rates in the UK are around about 5.1% at the moment. If we uh push ourselves forward, if we get on our time machines again and we whiz forward 10 years, SpaceX will have gone bust by then, of course, and uh and the NASDAQ will be at zero in in in a wishful world, of course. But if we look at the 10-year bond yields in 10 years time, 10-year bonds in the US are forecast to be 5.7%.

[00:13:21]5.7%.

[00:13:23]And 10ear rates in the UK are forecast to be 6.2%.

[00:13:28]So I don't think people are pricing in the fact that this is where the forward rates this is where if you if things go as as the mathematics are telling you they will these are what the yields will be and so I I I'm still very concerned that we are in this world of higher bond rates and higher bond rates are not particularly helpful to uh risk assets uh to start with over time they can get adjusted to it but I just think in the short term it it It's a problem. Now, there's more defense in some areas than others because clearly in Europe, we're already discounting interest rate rises.

[00:14:04]You know, mainland Europe, plus also here. And it's interesting how this week those equity marks have done a little better. They've held up better >> because there's there's more there's more protection. But if the US continues to keep seeing rising bond yields, then that will hurt everybody.

[00:14:20]>> Well, and and just to to talk about that, the national debt at the moment is $39.6 trillion.

[00:14:26]national debt of of the US. So if we go forward 10 years, the national debt will be about to reach $50 trillion on a 10-year yield of 5.7%. Those repayments are getting pretty pricey. The repayments at that stage will be the largest component of the budget. Y >> for the US and as a percentage of GDP, it will be over 150%. I I got a duck sometimes when I say the the things I'm going to say now, but you know, I I have a little bit of sympathy with oh, can't believe I'm going to say it with Rachel Reeves because she is about the only politician in the Western world who is trying to adopt a fiscal policy that is actually trying to reduce the amount of debt over time and reduce the amount of spending over time. That's not happening in the US. They just spend more and more each year. They go, "Oh, who cares? We just spend more. It doesn't matter." we get away with it.

[00:15:22]>> Well, we do at the moment, but you know, who knows? Maybe a big secular theme, you know, so not for this week, not for next week, but for five, 10 years out is that markets going to focus a bit more on how much money people have borrowed and their repayment and start to distinguish a little bit more between them. Now, you know, I'm I'm not trying not trying to sit here and hold up Rachel Reeve as the as the star chancellor of the world because, you know, they followed policies that haven't helped growth, whereas you could argue in the US they're trying to grow all the time. So, although they borrow more, hopefully growth picks up and can help alleviate some of those things. But it's just quite interesting how the market is has been treating things and is now treating things. And if this is the sign that the US is going to start moving towards a proper bond yield, as we talked about at the end of last week, there's quite a big distance to go yet.

[00:16:14]So, you know, it it feels a little bit I'm glad we've got a bit of cash. As I said, it's good to have some cash and just just sit and watch what's happening for the moment. I think that's a good place to be. To finish on a on a more positive note, as I'm often accused of not being very generous towards the UK, this week, believe it or not, the IMF, the International Monetary Fund, have only gone and upgraded the UK growth forecast. Go >> on, Rachel.

[00:16:40]>> 0.8% to 1%. Now, if you remember, we did talk about the UK GDP for the first quarter being better than expected last week. So, guess what? the economists have been forced kicking into raising raising the the growth rate to 1%. So that's good. Let's let's take that as a positive and I'm happy to finish my market report on that front.

[00:17:01]If today's conversation has got you thinking about your own portfolio, here's a timely one. IG are giving away free shares worth up to £1,000 when you open an account and invest at least a grand before the end of May. Use the code May shares pod. Details in the show notes. Full T's and C's at ig.com. Your capital is at risk. New customers only.

[00:17:24]Max £1,000 in shares and valid until the 31st of May on GIA, ISA or SIPS.

[00:17:34]Wonderful news. Well, that would explain why we see the Footsie 100 as only one of three parts of our portfolio to be higher this week. But it eaked out a 0.1% gain. Not quite great, but Spice, run us through the other performers on the positive side this week.

[00:17:51]>> Yeah, so this week, uh, one of our our dogs has barked at last. That was India.

[00:17:57]I say it's barked. It's up 0.6%.

[00:18:00]So, thank goodness, but I'll take a gain because it's been a real drag on the portfolio performance so far uh since inception, but particularly bad this year. I say up 0.6, that's our best performer. Then the Euro stock 600 up 0.2%.

[00:18:14]And you mentioned the Footsie 100 up 0.1 and cash now we have 20% sitting in cash up 0.1%.

[00:18:22]>> So CJ, take it away with the poor performers this week because there's one in particular I know you're going to highlight. Well, you know, I I think we we've we've talked about how excitable some of the things we're getting, and you remember some of the numbers we were showing around around some of our biggest winners, biggest losers last week. And this week, the biggest loser is the Black Rockck World Mining Trust down 8.2%.

[00:18:48]had a splendid fantastic week week before as gold, silver, copper and and and and and and all the other mining resources did well. It's had a very poor week this week as they gave back a lot of that. Again, copper down 4 and a half%. They obviously didn't hear the bullish story that Mark was giving them last week uh about how they should all be realizing their strikes so there's a shortage, but I'm sure it's only a question of time before they realize the error of their ways. And then the Niko and emerging markets down 2.8 and 2.6%.

[00:19:22]They'd run up very well on the back of the AI stuff and clearly it it was a tough week. But the most important thing I think about all our numbers this week is that the VANC fund isn't top or bottom. Why is that guys?

[00:19:34]>> I can't disappear.

[00:19:36]>> Disappeared.

[00:19:37]>> I think we sold it all last week and that was good news because since then it's come back quite sharply. So um at least that one was the right thing to do. it would have been down about seven and a half percent on the over the period that we're talking about here.

[00:19:49]And I think it's fair to say that copper though, although it's had a bad week because it was up so strongly the week before, it's still up up about 4% over the last two weeks. So, it's been a positive contributor over that time.

[00:19:59]>> And of course, we probably want to mention the the Chinese data being pretty damn weak and that's why we've seen these mining stocks come off and and copper as well.

[00:20:09]>> Yeah. Yeah. And I think importantly the the data in China wasn't followed up by sort of the the Ministry of Finance saying well actually we're going to start stimulating and trying to get this growth going again. So the the data was a bit weak. Um and I think that's what disappointed a few of the metals markets because China as we've said before buy 55% of all the world's commodities. So what if China sneezes you know the the commodity market takes a a bit of a tumble. Uh on the other hand, if they get their growth going, then uh it works the other way. But I think it's overall it's worth saying that we had a week where we're down 1.6% overall. So it's not a disaster. It's a short week.

[00:20:45]Remember, as I mentioned, we're recording this on a Tuesday. We normally do it on a Thursday. That leaves us up 7.8% year to date. And uh now since inception, still over 20%, just at 20.3% since we started. So I still think very respectable numbers there. So we should probably just before we move on to anything else think uh about whether we are have now got positions we are comfortable with given what's going on in the bond world. Rich any any thoughts from having seen the last two or three days have they made you feel good or bad? Well, good that we have 30% in pseudo cash, but you know, I'm still concerned. We we kind of unfinished business around India last week and unfinished business around the Russell 2000. Now, the bond yield move since we spoke on Thursday has been aggressive again and you know Russell 2000 is is a particular pain point due to those higher expected rates. So, I would still be tempted to take perhaps a little bit off um those maybe another 5% in total and move that maybe it's time to look at long-term guilts.

[00:21:58]>> Spice, what about you after the actions of last week? Were you did you did you reflect on this at all and with any positivity or >> No, I look I' I've nailed my flag to the mast on on the Russell. I think that it's important to remember that, you know, we in this portfolio, you need some exposure to cyclical growth and the US is, you know, in theory going to deliver the best sort of economic growth of all the major economies, the G7, even probably the G20 actually. I think that it's right to say that. Um, and the Russell's down two and a quarter% this week. It's not, you know, it's not a disaster by any stretch of imagination.

[00:22:35]It's still it's still the best performing sort of uh market in the US of the major major indices. Um so yeah, it's given a little bit back but nothing disastrous. I like to have that as a bit of a barbell. I like to have that potential cyclical growth in there. And I'd rather have it in the US than I would do in Europe, which is one of the reasons I was happy for us to sell the DAX last week, which is a very cyclical index. We've done that. We still got some Europe because we've got the Euro stock 600, which if you remember includes the UK and the European stocks in the Euro zone. So we get some kept some exposure there but just taken it a little notch down from the DAX. The place I still worries me and you know my instinct just because of the way I would run money uh India. Yes, it's popped up to the best performer this week but only 0.6%.

[00:23:19]It's a it's an irritant for me and now and uh I say that sort of sadly because I've been a big fan of India for a few years but it's just not performing in the way I would like to see it performing. I would rather sort of take it out personally. If you want to raise more cash, that's where I would take it from. Well, if we take India out or we take one another holding out, we're going to be left with just 10 holdings.

[00:23:40]We have 11 positions at the moment in the portfolio. So, we would go down to 10, which is becoming a little bit concentrated, particularly when 30% of that is in cash and it would probably go up to 35% or whatever you want to do with it. But, you know, uh that's something to bear in mind that the concentration in the portfolio is getting pretty tight. Now, in a little while, we have got a a good few viewer questions that we thought we would cover today, but one jumps out at me immediately on that comment, and it's coming in from Tash G, and it's saying, "Spice, you've had a fantastic run. You really have called it very well. What would make you now turn bearish?"

[00:24:19]Because it doesn't sound like you're sitting on the fence, especially around the US.

[00:24:25]>> So, what would be the catalyst to to change that?

[00:24:28]>> Okay. Right. So, to be clear, as I'm a momentum investor, the price levels don't worry me. I don't mind if it's an all-time high. I just I happily buy markets at all-time highs because I think they're there to make another new alltime high. By their very nature, they they got so price levels don't worry me.

[00:24:44]The technicals can do if if you look at the moving averages, if the overall index is sort of, you know, stretched against history against say it's 40-day moving average or it's 50-day moving average, which some of the big hedge funds look at. If it gets over overbought if you like then people will sell it. But that that's a short-term thing. That is not that doesn't make me bearish. That means that just maybe the market needs to sort of pause a bit or go sideways for a bit come down a little bit and then you go again. So I don't worry too much about the technicals. I watched the VIX. Remember one of the earlier episodes I talked about the the the VIX which is the fear index sometimes it's called. It measures volatility over the next 30 days in the markets. Well, the interesting thing is although the equity market has come down a bit this week, the VIX has been falling, which is a sign actually that people are getting less concerned about the outlook particularly over the next 30 days and I think that's them building in an end to the war at some point. But you know the VIX has been falling which is really interesting dynamic. So I'm watching the VIX. If the VIX have been going up and spiking up to over 30 when it goes over 30 and it's down at about 17 at the moment then I start to worry.

[00:25:46]But that's it. But that's when I I start to worry. The thing though that I I watch carefully uh is that growth rates.

[00:25:55]Let's look at the you know the US GDP or nominal growth the growth of the economy and I think it's going to grow at about 4% this year. If that growth is moving upwards which it has been we're getting upgrades coming through. We saw a great reporting season. The IMF are upgrading numbers. You know the the government officials are talking about higher growth in the US. You can live with higher bond yields. your yields going up, bond yield prices going down. As long as they're both as if you like as growth is going up while yields are going, you can live with that. If bond yields are going up and the growth starts to come down, to me that becomes bit of an issue because that says, you know, that the economy might be slowing a bit or falling and it's going to have to deal with higher interest rates. That becomes an issue for me on valuations.

[00:26:39]I'm not seeing that at all at the moment. Yes, we're seeing >> economics though, isn't it? If yields go up, that does slow the economy because lending slows. Just by choice, people um prefer to save more rather to invest because you're getting a better return and the economy just slows. My point is this that I I believe and I said this before, although the bond market is maybe saying it's 50/50 whether you get one rate rise in the US or they keep rates the same by this time next year, you're not talking about three or four rate rises like you are in the UK or in Europe in the US. So growth is going to be allowed to carry on accelerating without that higher short-term interest rates going through. So B government bond yields are so inflation may come through. But remember equities don't mind a bit of inflation. When we talked in the very very first episode, one of the reasons we like equities over the long term is because they give you a high real return over and above inflation. They're the best asset by a mile. They give you like 6 and a half% real over and above inflation over 120 years they've been doing that. bonds will give you about one if you if you're lucky and cash you actually lose money against inflation. So if in a world where there is this more inflation around I want to be in equities. I don't want to be in government bonds. I said yes last week I don't want to be in government bonds. Cash well you know it's it's it's a tactical reason we've got some cash at the moment hopefully looking for better opportunities to buy back into markets. But I suspect we're either going to buy bonds that the yields have gone even higher or equities where they've come back a bit. They've had a dip. Remember 3 to 5% fall. We've not seen anything like that.

[00:28:10]>> Okay. So, you're you're going to have to see the economy slowing. What are you going to use to gauge that?

[00:28:15]>> Uh, I'm going to keep looking at uh earnings growth because they, you know, we get more updates on earnings growth because companies report every quarter in America and we get a real almost a real time update on what's going on.

[00:28:28]I'll be looking at what Walmart's saying later on this week. You know, obviously Nvidia is going to be very important, but remember the earnings growth forecast have gone up from sort of 15 16% a month ago. now looking at sort of 25 26%. It's been a huge >> up entirely AI capex. You take AI capex out of the economy and it's toast.

[00:28:48]There's no other story.

[00:28:49]>> But I don't care. I don't care where it comes from. This is like an industrial revolution. It is I don't care where it's come from. And it spreads out. It is already spreading out.

[00:28:57]>> It stops then it's going to stop.

[00:28:58]>> What's going to make it stop? What is going to make it stop? Come on. Tell me what is going to make it stop.

[00:29:04]>> Well, they're now going into debt. The MAG7 names or the the hyperscalers are now not doing it out of cash flow. They are doing it out of debt. That's very very different from years gone by.

[00:29:17]>> But they can fund the interest charges interest payments because their cash flow is so good from the old businesses that they have in there. They are still getting massive cash generation out of their businesses. Yes, they're going into debt whereas before they had net cash, but with that excess cash before they were buying back shares, paying extra dividends. This time they're using on capex. They they think it's a race to going for this. I don't see anything that's going to stop it. I really don't see what's going to stop.

[00:29:42]>> But does that not take away? It's not economic growth at all that you've got to focus on. It's it's just the AI story. AI capital.

[00:29:48]>> It is economic growth. It's a big element. It's a bigger element than there ever has been of the of the US growth cycle. But it's not going away.

[00:29:56]And if anything, it's still accelerating. That's one of the reasons earnings forecasts going up. They're pushing the numbers even higher. Now, individual shares, we've talked about Meta when they said that their capex was higher than expected, the market punishment, the shares went down 7%. So, as long as they keep within the expectations that the market already have about the expenditures they're having, then that's that's fine. Um, so I'm I'm not worried about the this stopping anytime soon. In fact, I think it's going to spread out. That's one of the reasons I like the Russell 2000 is because as it spreads out into the broad economy, you get the benefit of that capex spin going into other things. But importantly, you get the benefits of the AI investment coming through in greater efficiency, greater profitability through higher margins. Sadly, it hurts employment. And as long as that doesn't get out of kilter and jobs get lost too quickly, then I think that in the US particularly, it's a great mix at the moment. I'm very happy to stick with those. So, it would seem as though really it's just listening to to the two of you, it's it's really a fight between the AI effect on the economy and the rising interest rate effect on the economy and which impacts first and by how much because you could paint a scenario where the you know people are very excited about AI interest rates have to go up on the back of the bond yields moving up because inflation's going higher and this and the um real economy comes off quite sharply. Or you could paint the other way where AI does really well and their changes help to keep to to act as a a a uh a a balance against the real economy what's happening to the earnings of those smaller companies. So it's it's really a belief in AI story. It's really what it comes down to because what's happening in the bond land is is not helpful for anybody in any way, shape or form. And you know, I think we we can say and we have said on many occasions, you know, equities can cope with high yields.

[00:31:56]That's fine. They can't cope with them quickly. That's what you saw in in 22.

[00:32:01]So you to me this is a perfect example like 2022 where bond yields moved up equities real economy equities sold off aggressively everyone got really bearish saying it's going to be a recession it's going to be terrible they were completely wrong because the tech earnings and everything started coming through and actually uh acted as a balance of compensation for the weakness in the real economy and that's what happened in 22 23 the question is are we going see a similar situation now. Are we going to see a a hit to the real economy which drags down everything which then gives you a buying opportunity to buy back in to those other things? I think the juror is out to be honest. I I mean at the moment with bond yields where they are at the moment, it's probably not not a problem.

[00:32:50]If they keep selling off at the speed they're selling off at the moment for the next week, there's no way the US equity markets will be as high as they are now. Not a chance. We might be in the wrong thing then because the AI, if it's AI against yields, yields are going to impact the Russell 2000 much more than the NASDAQ's bulletproof from from AI. We're in 7 and a half% in something that doesn't benefit from AI for at least 6 to 12 months.

[00:33:20]>> Well, that's already that is the argument. The argument is will it gets affected by the real economy those smaller companies or are they already seeing the benefits of AI coming through and that will um act as balanced against the uh effect of the economy and at the moment we don't know the answer to that. That's why last week I sold about the van because the van I was happy to sell because it was priced for perfection in an economy where interest rates are going up. The question is, do we need to, as you say, reallocate some of our equity around to different areas? And I I don't feel strong enough at the moment to want to press the button on anything there. Um I, you know, we we we're going to revisit this again without any doubt because what makes me stay awake at night is more the Russell bit than the S&P bit. I can see the S&P bit quite happily pushing on with the earnings they've had and still not being a massively overaggressive um multiple. I can see a timing issue with the Russell where it's run very well over the past few weeks on the back of lower interest rates, stronger growth rates, and the lower interest rates have now disappeared. And the story now seems to be, well, it's not lower interest rates, it's now AI. And I always hate when stories change, but I don't think it's at all something that we we're decided upon here. So I I think I think we need to watch it a bit longer. You asked a great question from um our uh our listener and I think one of the things that we we need to highlight is the way the styles differ, right?

[00:35:09]you like to sell things that are moving up or are hitting highs where you think the story is changing a little bit >> if the valuation doesn't support >> it. You know, you you're looking at valuation, you look at that. Me, I'm just too aggressive on if I've made some good money, I just like selling it and go and move on something else. The spice is a momentum investor. So, Spice will play the momentum and over time, momentum has been, we've said before, the most successful factor in the markets. But you do need to understand that Mark will sell at a lower price than you will sell because he will sell because the momentum's turned whereas at that stage you probably won't want to sell anymore. And that's where we have to mold these styles together and makes this a an interesting podcast to chair because at the turning points it will be very difficult as we found last week when we were trying to decide what to sell. So me I I'm not suggesting we need to do anything here. I don't like the way the bonds are performing. I think they are confirming what we thought.

[00:36:06]We've raised our cash. That's good. Do I think it's the start of a big crisis?

[00:36:11]No, I don't. It wouldn't appear on the front page of the FT if it was start of a big crisis. Do I think we may well get a 5% decline? Yeah, I do think we could, but in which case, we should then use that money to go back into the market.

[00:36:20]>> I think it also highlights the the difference in experience that we've got.

[00:36:24]So, of course, I was a fund manager for a hedge fund. So, $100 million, but I didn't have to be invested. You know, if I could go on holiday and have the whole lot in cash and to be honest, that was better because I used to have to pay five and a quarter% for that cash.

[00:36:42]>> Yes.

[00:36:42]>> So, that was my cost and that came out my P&L every night.

[00:36:46]>> Spice, what allocation would you have had to cash?

[00:36:49]>> I'm a natural natural bull. So, naturally, I want to be fully invested.

[00:36:53]Only very occasionally when I get worried as I mentioned something like say yields are rising, the growth is beginning to fall, I might start to build a cash position in that. But the most cash I would ever be able to hold would be about 10%. Because if you run a unit trust, you're not allowed more than 10% in any one position. And that includes cash. So my worst case scenario, the most bearish I would be, I'd have to own uh 10% cash.

[00:37:18]>> Yeah.

[00:37:19]>> Most bullishly, I would want to be fully fully invested and maybe have 1% or half percent in cash. And you only keep that there just in case there's a rights issue or a placing or something like that or an opportunity to go and buy something else. Normally, I'd like to stay fully invested. So, if I saw another opportunity, it would force me to look at the rest of my portfolio and decide, do I, you know, there's an opportunity cost here. If that's so good, I need to sell something that isn't as good in my portfolio to get the cash to go and buy that.

[00:37:45]>> And that makes you forces you to make that decision all the time. It means you're always looking at the way your portfolio is positioned and hopefully it's giving you the best possible returns. There's you don't want sleepers in your portfolio. They're not adding adding any value.

[00:37:57]>> And CJ, what about bond worlds? What what do you do in bond world running a portfolio?

[00:38:03]>> Yeah, I think bonds is is a little bit is a little bit easier than equities because I think as I think as Mark says when when someone takes you on to run a UK equity fund let's say or a global equity fund they expect you to be invested in the global equity market or the UK equity market in the bond land in bondland they they recognize cash far more as a alternative instrument because cash you could describe cash as a bond with zero maturity. I mean, that's exactly what it is. It pays you an interest rate and it's got very, very low maturity cash. So, you could regard cash as part of your bond portfolio. So, we would always have a fair amount of cash uh if we were defensive. Obviously, if we weren't defensive, we would be fully invested as well. But the the macro land, the macro world of bonds and and currency, there's far more use of moving out of this asset class into another asset class. Whereas in equities, you're buying people for their their skill at picking equities and the right the right equities to be in more than you're buying them to be asset allocators, I think.

[00:39:04]>> And this actually takes us to to a question that we've had. The question was around trying to understand why bonds aren't behaving as expected in this situation. What are potential lower risk alternatives even in equities spice that might be bond proxies? So like utilities for example or yeah what what are some of the other options apart from being in bonds? So if you just look at one country like the UK then you could look at say if you if you're feeling more cautious you move into more defensive sectors as you as you've alluded to. Utilities is a very good example of that normally if they're going to change government and then more exactly but that's going to cost them a lot of money so maybe they'll go up and our utilities are mostly owned by the French anyway so it doesn't really matter. You move into things like the pharmaceutical sector uh or consumer staples as they're called companies like Unoliever. people have to go out and buy, you know, their food stuffs every week. Tesco's and these companies, >> toothpaste, all these those companies.

[00:40:05]So, if you're in one market, you can sort of you go and buy those sort of sectors. Uh but if you want to if you're looking at multiasset, if you're looking across the world, then there are certain there are two main indices that that actually are very defensive compared to the rest of the world. One of them, ironically, is the Footsie 100. The Footsie 100 is, you know, we've got 14% or so in healthcare, pharmaceuticals.

[00:40:28]Glaxo and Astroenica are our two big plays there. We've got consumer staples.

[00:40:32]We've got 18% of the portfolio in consumer staples. Um, so yeah, it's a pretty defensive market, the UK, Footsie 100. And the other one in the world that stands out like that is Switzerland. So the the Swiss uh market index, there's 20 stocks in it. It's very heavily weighted to healthcare. 36% of it is in healthcare.

[00:40:52]uh and 20% is consumer staples. There are three stocks that are over 50% of the market. One of them is Nestle, who we all know, make chocolate, all the rest of it. I got a table the other day.

[00:41:02]Uh and a rush, who a sort of pharmaceutical company, a Novatist, all these are big pharmaceutical companies.

[00:41:08]Those three companies alone make up over 50% of the market. So, >> can I can I just say can I just say that I I I think I thought I heard you say over 50% each. You meant 15%, didn't you? Just for everybody who's listening, each of them is over 15, which when you add them up over is over 50%.

[00:41:25]>> Exactly. Okay. I say if you're doing on a global where do I put my money in which country, >> you and you're defensive, you're feeling cautious, you go to the UK and Switzerland. And if you feel aggressive, you probably go to America and emerging markets, uh, Japan where we are, where we've been positioned. But to tackle the first part of that question, um Mark spoke about this a couple of pods ago and he was very very clear and good on this which is bonds have been in in history a reasonable diversifier in your portfolio and people have got lazy in thinking a wholesome bonds that diversified my portfolio and that's not correct. Bonds remember are driven by interest rates and the reason why they were a good diverser in the la divers diversifier it's easy for me to say in the last 20 years is that when equities were coming off everyone expected the central banks to cut interest rates cutting interest rates mean interest rates would fall interest rates falling mean bond yields fall if bond yields fall what do bond prices do go up >> right so they would go up when equities went down. So, it's a diversifier.

[00:42:35]But the time it doesn't work is when inflation expectations are driving the interest rate move. If inflation is driving the interest rate move, the the inflation moving upwards makes central banks want to raise interest rates.

[00:42:54]Rising interest rates undermines the equity market as well. So you get bond prices falling at the same time as you get equity prices falling which is what you saw in 2022.

[00:43:08]Now part of the question was some examples in the past you know the 2008 2009 financial crisis bond yields rallied very strongly because they cut rates to zero effectively around the world. So your bonds work really well in your portfolio. Your your equities almost fell to zero. Well, they didn't quite fall zero, but they fell down 50%.

[00:43:30]But your bonds rose in price significantly. So, they were acting as diversified. That isn't happening now, and it will not happen. While the driver is inflation moving upwards, which drives bonds and equity prices in the same direction.

[00:43:45]>> So, at the the beginning of the crisis, then what did you do? Do you do you trade the short end because things are moving so quickly? And how do you look at it short end to long end?

[00:43:56]>> Well, the first thing you have to understand in the bond market like in every other market is that when the uh proverbial hits the fan, everything goes illquid. I remember um having 21 lines on my desk to different investment banks and only two would make me price in the long end of the guilt market. One was RBS and one was Barclays and everyone else ran away and would not make a price. The price would be a point wide 99 to 100 or 103s 104. Usually these things would be 10 cents wide. There would be a point wide and probably in 25 million not in the normal 100 million that you'd be trying to deal. But they rallied and they rallied and they rallied because everyone thought this is a nightmare for the world. It's going to be a massive recession. Inflation's going to collapse. Bond yields are going to collapse. If I can buy a bond yielding 5%, that's got to be brilliant because it should be yielding one. And that's what happened essentially. So that's why the bond market moved the way it did then because this wasn't an inflation problem. It was an asset overvaluation problem and the bubble popped and therefore all interest rates would have to go lower to to try to float the system. Right. Next question from Gabrielle. Now Spice the topic is how to maintain asset weightings in your portfolio as things go up and down. So do we rebalance the portfolio and is it on a periodic basis or is there some kind of trigger?

[00:45:31]>> The portfolio that we show you we keep at the same percentages whether they go up or down every week. Uh because we're we're not trying to be overly sophisticated with this. We're just keeping as is. Now, ironically, when you're performing well, those positions would have got bigger and bigger and bigger and you would have performed even better. So, it would have enhanced your performance. If we'd let it go down and things that were going down, they would obviously hurt you. So, that we keep it at exactly the same sort of percentage.

[00:46:00]Now, as a as a portfolio manager, when I had my other hat on, when I was doing it professionally as an investor, I would as a momentum investor, I would run my winners for that reason. Uh, and the only reasons I would ever I would ever sort of cut them is if I thought things had changed or something had changed or I'd made too much money in it or had another opportunity to invest in, as I was saying earlier on, you had to take money out one thing to put it into something else. But there are also some rules that if you run a unit trust in the UK, USITs fund, there are some basic rules that anything that is over 5% of your portfolio, you can't all the things over 5% if you add them all up can't come to more than 40% of the whole portfolio. So that constrains you a little bit and you're not allowed to own anything over 10% of the portfolio.

[00:46:43]Again, you can't run a position and have 30% in one thing, 25% in another, and another 25% another, and the rest in, you know, five other stocks. You can't do that. So the rules make you do it. So I was cognizant of that. And so if you know if you're lucky enough to have a big position uh like you might have 9% in something it gets bid for it goes up 30% happy days and then you realize you've got to sell some because instead of being 9% of the portfolio it's 12% of the portfolio if it's a 30% premium and then you have to sell that position down to get under that 10% again. So those are the only reasons I personally would change the the the sort of the weightings. Uh now you know other people do it different ways but that's the way personally I did it. And it's interesting actually because of course we've we've got Spice X coming to market and I can reveal the ticker on the NASDAQ is going to be SPCX.

[00:47:33]So it even plays into it more. But that's going to be going into the NASDAQ on June the 12th, just 6 days after the IPO, which is not a normal situation. So there's going to be rewings in the NASDAQ for such a big company. What do we think 2.4 trillion is it now? We think it will be.

[00:47:49]>> That's IG indicating it's about 2.4 trillion. Yeah, it's interesting. It's going to be fantastic and interesting to watch. I'm not sure I'm going to be wanting to play that one personally. I'm going to sit back and watch and let other people burn their fingers one way or the other. Right, last question then.

[00:48:05]Chris, has the big rise in passive investing in recent years created systematic risks by weakening price discovery? Could cap weighted index funds be inflating the biggest winners leaving markets more vulnerable to a sharp correction if sentiment eventually changes. And that's from Mark H.

[00:48:25]>> Not me.

[00:48:27]>> Okay. So, uh, a couple of definitions I just want to give to start with, you know, explain what an active fund is. So an active fund is where a fund manager tries to beat an index or benchmark by overweing or underweing the constituents of that index or hold securities not in the index to outperform. So for example, I'm running a fund against the S&P 500 and act as active manager. I might hold constituents of the S&P 500. I might hold position of the Russell 2000. I might hold constituents of the NASDAQ.

[00:48:57]Whatever it is, but my aim is to beat the index. And I do that by actively moving things in and out. For that I charge a handsome fee. Thank you very much sir. And normally I deal if you want to buy or sell my fund you have to wait a day to do it. So if you give an instruction to buy it today you actually get the price tomorrow. Okay. So that's an active fund. A passive fund is a fund that achieves the index performance via mathematical techniques. We don't need to go into it now. And you pay a very small nominal fee for that. So you so you will get virtually the performance of the index once again your dealing period is the next day. So if you give instruction by today you do it tomorrow.

[00:49:41]Now an ETF is a listed security. So it's listed on the stock market trades all the time that can either follow a passive or an active strategy. Why one of those two strategies? But as it's listed it could be traded throughout the hours the market is open. So the advantages in a fast market are you're able to deal in it all the time. Okay.

[00:50:03]Now active managers of which I was one um uh uh for many many years have unfortunately been unable to consistently outperform after fees. We haven't done a very good job. Sorry guys if you're listening we've done pretty badly.

[00:50:17]So that's why passive business has become dominant. And within that the ability to deal in the market means that that the funds are losing out to ETFs.

[00:50:26]passive ETFs is the golden triangle at the moment. So let's go back to the question when people move into and and out of the market now because passives are taking overwhelming amounts of business now >> they are going in to the indexes and at any particular time if they're very big inflows they can move and distort the markets but they can only do it for a short period of time because your active manager then comes along and he says hold on a minute A looks expensive compared to B I'm now going to be active and I'm going to try to take advantage of that situation. So my personal view is that over time your in your indices your your passive investment is not distorting the market but at any particular time if a loss has gone in at a particular time it could do and it might give some opportunities.

[00:51:22]Now for most people that's not relevant because most people buy passive ETFs and so they buy that index anyway. But as I said over time I think that it is uh not going to distort because of those active managers. Now the danger is and this is where I think a number of people come from these days. The danger is that active management is not a great business um at the moment. People are losing money to passive managers.

[00:51:51]money's moving away from active people.

[00:51:53]So if the number of active players actually starts to fall off and so there aren't very many at all, then clearly if there's nobody to do that job, then the markets can be distorted by these big flows into the indexes.

[00:52:10]But as long as you've got a healthy subdivision of passive managers underneath, they should very quickly be able to move any of those distortions.

[00:52:21]>> I think it's important to say that if you looked at the overall splits, there's about 55% of the current assets under management are passive as Chris has just described, those exchange traded fund, those ETFs, and the active is only 45%. It wasn't that long ago that the that that was reversed, you know, 55% in favor of active. In fact, going back 30 years ago, 100. It was basically pretty much everything. But the cost of getting the result you want replicating the S&P 500's example, um, performance, you get it for a very low cost rather than paying an active manager to do it. A lot of people have chosen to do that. The other thing I'll just add is that you don't have to buy the indexer that is very skewed to the very biggest names. like you know if you want to buy the NASDAQ 60% of this technology you can buy an equal weighted sort of index. So if you're worried about the S&P having seven big companies magnificent seven driving everything you can actually get one that has equal amounts in all 500 companies in the S&P 500. So if you personally are worried about this concentration risk then you can buy an equal weighted ETF fund at a very low cost and it will give you a very different return because it'd be you know the whole aggregate 500 companies each with the same waiting >> and that's quite is quite a good way to get exposure to that 493 isn't it?

[00:53:38]>> Yes absolutely. Yeah. Yeah. But you you got to you got to I mean you you have to work out guys what is it why are you investing in the index. One of the reasons might be because you want the momentum factor because you know momentum is such a powerful thing that you want the index the index essentially runs its winners and gets rid of its losers. You know if your stock 500 in the S&P and something stocks 530 has just gone from 530 to what would have been 475. Let's say the 500th gets kicked out that one comes in. You've got winners replacing.

[00:54:07]>> Mhm. So to me, you know, yeah, I mean, Mark knows because I've had this conversation with him a few times. One of the reasons that I buy the NASDAQ is not because I know anything about anything to do with a component part of it at all, but I think the NASDAQ is the best um example of a momentum index you will find because when it wins in technology, it wins big time and it dominates and you look at the performance of that index and it very rarely has bad periods. It goes up an awful lot when it's when it's going.

[00:54:40]When the momentum goes wrong, it does very badly. So when you don't want momentum, maybe you want to get out of these broads. So maybe that should be your strategy. When you want to be a momentum investor, you buy the normal index.

[00:54:51]>> And when you want to get defensive, you buy the equal weighted one. Yeah, we might we might have to try that on on on AI and and see. Have I I've perhaps invented the next biggest trade to go with bonds of last week. On that note, it seems a great time to finish. Thank you very much for joining us and we'll try as much as possible to answer your questions in an episode. Jents, where should they write to?

[00:55:16]>> The art of investing.com.

[00:55:19]>> Thank you very much. Give us a thumbs up. Give us a like and drop us a review or a comment to tell us how much you enjoy Spices Market Update. And if your wife walks out of the room when CJ starts speaking, have a great week.