Latest news with #TomStevenson
The National
4 days ago
- Business
- The National
Bond market is sending out distress signals, but investors don't need to panic
Investors tend to fixate on the stock market, but there are times when the bond market cries out for our attention, too. That's definitely the case today, because it's sending out distress signals. The global bond market is actually the bigger of the two, worth about $140 trillion, compared with $115 trillion for equities. And when bond yields surge, the ripple effects can shape everything from mortgage rates to stock valuations and government solvency. In recent weeks, yields on long-dated US government bonds, or Treasuries, have jumped to their highest levels since the global financial crisis. Investors are demanding more interest to lend to governments awash with debt, at a time when sticky inflation deters central bankers from slashing interest rates. Tom Stevenson, investment director at Fidelity International, said the US 30-year Treasury yield climbed above 5 per cent in May as markets recoiled at US President Donald Trump's new tax cut proposals, known as the 'Big, Beautiful Bill'. That package alone could add more than $3 trillion to US debt, which already stands at a mountainous $36 trillion. It could lift the country's debt-to-GDP ratio from about 100 per cent today to 125 per cent within a decade. 'The prospect of higher borrowing and unsustainable debt servicing costs led Moody's to downgrade the US prized triple-A credit rating. Debt interest payments, already at $880 billion a year, will rise further as a result,' Mr Stevenson says. He sees trouble ahead. 'The US has lived beyond its means thanks to strong global demand for its debt. But confidence is beginning to wane, with investors seeking to diversify elsewhere.' Vijay Valecha, chief investment officer at Century Financial in Dubai, says a similar story is unfolding elsewhere. In Japan, 30-year yields have climbed towards 3 per cent following the weakest demand in a decade. In the UK, 30-year gilt yields briefly touched 5.55 per cent as government borrowing soared. Yet at the same time, stock markets have rallied after Mr Trump paused his 'liberation day' trade tariffs on April 9, Mr Valecha says. 'US markets enjoyed a V-shaped recovery with the S&P 500 up almost 20 per cent, while the tech-focused Nasdaq rose 27 per cent.' The UK's FTSE 100 and Japan's Nikkei 225 are both trading above key technical levels, he adds. But investors shouldn't assume this will continue. 'Global government debt is rising fast, pushing 95 per cent of GDP," he says. "If this continues, debt could reach 100 per cent of GDP by the end of the decade.' Global inflation is also proving sticky, driving up interest rates and yields. That's a warning shot for stock markets. Mr Valecha flags up something called the 'equity risk premium', which measures the difference between what investors can expect from shares and the yield from lower-risk bonds. 'As bond yields rise that gap gets smaller, it becomes harder to justify paying high prices for shares, especially when valuations are already stretched.' The equity rally may continue but it will be bumpier, and careful stock picking is required, Mr Valecha says. Near-zero interest rates Near-zero interest rates allowed governments to borrow freely in the past decade, but that era is now over, says Charu Chanana, chief investment strategist at Saxo Bank. 'Rising sovereign debt is arguably one of the most underappreciated long-term risks to global financial stability.' If interest rates remain elevated, this could crowd out public investment, put pressure on social spending and, ultimately, reduce economic dynamism, she says. High debt levels also suppress growth, which fuels more borrowing in a vicious cycle. 'The fiscal space to respond to future crises is being eroded,' Ms Chanana says. The risk is amplified in emerging markets, many of which have borrowed heavily in US dollars, making debt harder to service if their currencies weaken. Corporate earnings remain resilient but the equity rally may have run its course, she says. 'Further equity upside may require either stronger earnings growth or a clearer path towards monetary easing.' While cash and bonds offer short-term comfort, don't overdo the flight to safety. Ms Chanana warns that higher inflation will chip away at the real return. 'Increased exposure to cash or bonds may not be sufficient to preserve or grow wealth over the long term.' Instead, she favours a diversified approach. 'Equities, particularly those tied to structural themes like AI and digital infrastructure, continue to offer compelling growth opportunities.' While gold has stood bright as a hedge against inflation and economic and political volatility, it also has one big drawback as yields rise – it doesn't pay interest or dividends. Higher yields increase the opportunity cost of holding gold, but that hasn't deterred investors yet, with the price up 26 per cent this year. 'Gold still plays a strategic role as a hedge against systemic risk, currency debasement and geopolitical uncertainty,' Ms Chanana says. Should investors turn back to bonds? Tony Hallside, chief executive of Dubai-based brokers STP Partners, agrees that gold still has a role to play in a diversified portfolio but suggests rebalancing towards high-quality fixed income. 'Investment-grade bonds, especially with shorter durations, provide attractive yields while preserving capital. They offer stability and liquidity when markets turn turbulent." 'That doesn't mean abandon stocks entirely, but it does mean being more selective." Amol Shitole, head of fixed income at Mashreq Capital, sees an opportunity in emerging market bonds, particularly in the Middle East and North Africa. Mena bonds continue to enjoy haven status due to their superior credit quality, he says. 'We favour the UAE, Qatar, Oman and Morocco for their strong fundamentals and ongoing structural reforms.' He says Mashreq remains underweight on Saudi Arabia and Bahrain, citing fiscal risks and tight valuations. He doesn't expect US yields to spiral uncontrollably. 'We believe US Treasuries will continue to benefit from flight-to-safety demand during slowdowns or uncertainty.' In equities, he sees opportunities in small caps and value stocks, particularly as higher interest rates pressure growth sectors. 'A well-diversified multi-asset portfolio including equities, fixed income, gold and alternatives can yield attractive returns of 7 per cent to 7.5 per cent a year.' There is little prospect of a return to ultra-low interest rates, but at least this means bond investors are being rewarded gain. Equity investors must be more careful, but strong companies still offer solid long-term value. Gold remains a valid hedge. As ever, diversification is the best defence.
Telegraph
19-04-2025
- Business
- Telegraph
The era of American stock market exceptionalism is over
Nearly three quarters of fund managers think that US exceptionalism has peaked. The prevailing trend of the last decade – a belief in the continued success of US markets far beyond that of other regions – is over, according to the Bank of America's latest survey. Over the past two months, fund managers have dumped US equities at a record pace as President Trump's tariff war and uncertainty over global economic stability continue. For those watching closely, it should not come as a shock, although it has happened perhaps a little faster than anticipated. While it has come to feel like business as usual, US exceptionalism isn't the historic status quo. In the 1980s, for example, the rapid rise of Japanese stocks challenged the US dominance of global markets. Tom Stevenson, investment director at Fidelity Personal Investing, explains that ultimately, the stock market bubble was over-inflated and had a long way to fall – a scenario today's US market is particularly vulnerable to. One of the most notable pinpricks came at the start of this year with the release of DeepSeek, a sophisticated AI tool developed in China. The extremely cheap development cost of the model has sparked concerns that the AI moat of the American tech giants may not be as wide as had been assumed. Since 2012, average earnings from US stocks have risen 145pc – over the same period, European and UK markets have each seen earnings increase by just 37pc and 30pc, respectively. Hugh Gimber, global market strategist at JP Morgan, says: 'Technology has been the leading sector globally and the US has been overweight in that sector. In an environment where technology [stocks] have been standout it has been hard for other regions to out perform.' However, the performance gap between the Magnificent Seven (Apple, Microsoft, Amazon, Alphabet, Tesla, Meta and Nvidia) and the rest of the S&P 500 has narrowed of late. A year ago, the tech giants were outgrowing the rest of the US market by 30pc, a figure that has plummeted to just 6pc. That is expected to halve to just 3pc in 2026. The upset is apparent in other metrics, too. While the Magnificent Seven accounted for 50pc of the S&P 500's earnings in 2024, this share is projected to fall to a third for 2025. All of this adds up to a simple fact: US equities are unlikely to outperform the rest of the world to the extent that they have done in the recent past. In fact, Mr Stevenson warns they may underperform. Markets are also becoming suspicious of US government debt, which could have dramatic consequences for the stock market. Mr Gimber explains: 'One of the big parts behind the US economic outperformance is the size of the government deficit that has been running. 'This has been an expansion built on US government debt, and although levels are still rising the market is getting wary of US government debt, especially in the context of inflationary pressure from tariffs.' By contrast, Europe and the UK are running smaller deficits relative to their economies and are increasing their commitments to defence spending, increasing fiscal stimulus. Typically, when equities are struggling, money flocks to the dollar as a safe haven, but now even the greenback is under strain. Jamie Mills O'Brien, investment director in European equities at Aberdeen, says: 'The dollar is not behaving like a safe haven currency in the way you would expect it to. 'Dollar weakening as equities are weakening points to a different way that asset allocators are viewing the market.' Stevenson agrees: 'That is relevant for a UK based investor – if the US market is no longer outperforming and you have a drag from the currency, then that makes a case for lower exposure to US dollar-based assets.' As a result, investors with global portfolios are likely to be looking to diversify further beyond the US than they have in a long time. The MSCI All Country World Index, a global equity index, is weighted 63pc to the US due to its exceptionalism. As that faith wavers, this appears risky. Charles Sunnucks, portfolio manager in emerging market equities at Oldfield Partners, says: 'I don't think people understand how concentrated the world index is. 'Friends and family have been surprised by their level of exposure.' So where do investors turn? Investors are not entirely turning their backs on the US, but appear to be considering their options. Fund managers are now 36pc net underweight in US equities, the highest level in the past two years. For managers in other regions, this is an opportunity. Mr Sunnucks argues that while individual countries within emerging markets are at higher risk, a fund invested across these regions can capitalise on the fast-moving cycles that offer accelerated growth opportunities. Investing across Europe, the Middle East and Africa (EMEA), for example, offers a more diversified pool of stock than the tech-heavy US. Incidentally, the US may have built a rod for its own back, with the rise of AI making emerging economies more accessible than ever before. As Mr Sunnucks notes, AI can remove language barriers and assist with the initial due diligence process, previously extremely cumbersome and potentially expensive tasks. The current upheaval has also sparked interest in more familiar markets. Mr Gimber argues there are positives to be found across the UK and Europe as a result of likely countermeasures to the current geopolitical environment. An evolving policy mix in the US has fundamentally altered how European governments consider fiscal stimulus, while ongoing trade conversations provide a more optimistic outlook for investors and challenge the dominance of US growth. Mr Mills O'Brien agrees: 'The fiscal prominence of the US is being challenged by the European economies with proposals for spending packages, while the US is contracting government spending.' How should investors view the world in this new light? Mr Stevenson urges them to reconsider their allocation to the US. The investment director suggests a 50pc exposure to US stocks is a currently prudent level, but warns anything lower would be a 'bold call'. He says: 'The US may be facing challenges from China on the tech front but it still has such a dominant position in the industries of the future. 'I always say betting against the US is a really bold thing to do as an investor. It has rarely paid off.'
The Independent
14-04-2025
- Business
- The Independent
European shares rebound as markets ‘regain poise' after volatility
European stock markets rebounded on Monday with trading starting on steadier footing following a tumultuous week. UK and European stocks gained ground, while the US's top indexes were climbing higher in early trading. London's FTSE 100 rose 170.16 points, or 2.14%, to close at 8,134.34, recovering some of the losses made over recent days. Nevertheless, it remains considerably lower than it was before Donald Trump's tariff announcement earlier this month, which sparked a heavy sell-off in stock markets around the world. Europe's biggest indexes also leapt higher after dipping at the end of last week, following a sharp improvement on Thursday. Germany's Dax index jumped 2.85%, while France's Cac 40 ended the day 2.37% higher. Top US indexes opened higher on Monday as a greater sense of calm swept the financial markets. The S&P 500 and Dow Jones were both up about 0.2% by the time European markets closed. Tom Stevenson, investment director for Fidelity International, said: 'After a rocky week, as investors struggled to price in changing trade and tariff policy, markets seem to have regained their poise. ' Shares pushed higher all around the world on Monday after scoring a technical bear market – a fall of more than 20% from the latest peak – at last week's low point. 'The pendulum swing of US policy was in full evidence last week. 'Shares soared on Wednesday after a 90-day postponement of swingeing trade tariffs suggested that Donald Trump remains focused on the market reaction to his radical bid to reshape the global trade landscape.' The pound was also strengthening against key currencies. Sterling was rising about 0.75% against the US dollar, at 1.318, and was up 0.4% against the euro, at 1.16. In company news, John Wood Group said it had received a fresh takeover bid from Dubai-based suitor Sidara, almost a year after talks collapsed. The new offer would value the company at around £242 million – significantly lower than the previous £1.56 billion takeover approach. Wood said it has continued to assess other potential refinancing options alongside holding talks with Sidara, but that its board members think the potential takeover offer is the 'better option'. Shares in the group closed 4.4% higher. Elsewhere, shares in Ashmore dropped after the fund manager reported its total assets under management dipped by around 5% over the latest quarter, compared with the previous three-month period. The company nonetheless said emerging markets had shown 'resilience' in the face of recent volatility, and that it benefited from higher subscriptions activity over the quarter. Shares in Ashmore closed 6.4% lower. The biggest risers on the FTSE 100 were Melrose Industries, up 22.4p to 427.4p, St James's Place, up 40.6p to 864p, Standard Chartered, up 46.4p to 989.4p, Barclays, up 12.45p to 270.4p, and Intermediate Capital, up 77p to 1,750p. The only stock to fall on the FTSE 100 was London Stock Exchange Group, down 90p to 11,075.
