| Politics may be dominating headlines, but markets were largely unbothered. The US government shutdown has rolled into a second month, while the Federal Reserve cut interest rates again but the UK kept theirs on hold. At home, all eyes are on the Autumn Budget, where higher taxes look inevitable. Technology and artificial intelligence haveinvestors buzzing once again, though high spending and a few eerie echoes of the dot-com era have left some questioning the hype. The global economy continues to feel like a stage production with too many leading actors. Over in the land of patriotism and pickups, a US government shutdown has entered its second month of inaction, with hundreds of thousands of workers forced to stay home. Each passing week drags on economic growth, leading to billions in lost GDP. Markets, meanwhile, refuse to be bothered, perhaps because political fatigue syndrome has moved from outbreak to epidemic. As the month drew to a close, self-styled “master dealmaker” President Trump announced that a US trade deal with China could be imminent, following a ramping up of tensions in recent weeks. The uncomfortable truth is that, as much as both countries may dislike each other, they are intricately intertwined in matters of trade, debt (China owns a whole heap of US government bonds) and financial interdependence. They may dance a dance, but cold war favourite MAD, or mutually assured destruction, is alive and well. Towards the end of the month, US interest rates were trimmed by 0.25%, the second cut in as many meetings, bringing borrowing costs to their lowest level since 2022. To the dismay of potential homeowners, the UK held theirs unchanged, as the inflationary spectre refuses to leave the feast. In the UK, the Chancellor is busy preparing for her Autumn Budget and testing public appetite for “tough decisions”. That phrase, of course, usually translates to “more tax”. Speculation is rife over what changes might be coming, but Labour continues to trail in the polls, and this Budget doesn’t appear to be the thing to get them back on track. Markets have continued rising since their lows in April, but everything related to AI remains very much in focus. Chip designer Nvidia became the world’s first five trillion-dollar company, and the spending plans of the biggest tech players would make even Caligula blush. Some investors are starting to see similarities with that other technology market boom at the turn of the century, a period when cash flows and common sense were firmly optional. One major difference is that many of today’s companies are actually generating a profit, but they are also spending money faster than it can be printed, and are so interlinked that if one falters the pain would be felt everywhere. Bottom Line Despite the political chaos, markets remain composed. Inflation is no longer the villain it once was, interest rates are edging lower, and economies are pootling along. That does not mean risks have vanished, and some turbulence should be expected, especially if market leadership begins to shift. Remaining diversified and disciplined should remain the order of the day. |
| Q&A: What’s on your mind? |
| Is there a bubble in technology and AI stocks? A bubble occurs when asset prices rise far above fundamental value, and, as with real bubbles, they can eventually burst. In recent years, AI enthusiasm hasdriven tech stocks to record highs, none more so than Nvidia, which surpassed a $1 trillion market cap in 2023 and is now worth more than $5 trillion. Nvidiais part of the “Mag-7,” a group of top US tech firms that have been powering equity markets in recent years. Many recall the late 90s dot-com bubble and itslong recovery, making them cautious about today’s exuberance. By some common measures of value, US stocks sit about 40% above their long-term averages, and market concentration is extreme: the Mag-7 represent nearly 40% of the total market. These same names also account for roughly 25% of global equity markets. While valuations are elevated, they remain below the extremes of the dot-com bubble. More importantly, today’s tech leaders are highly profitable, maintain strong balance sheets, and continue to deliver robust earnings growth, a stark contrast to many of the unprofitable, speculative firms of the dot-com era. Concerns remain: will AI truly transform the economy, and can tech firms turn massive AI investments into lasting profits? What is private credit? Private credit refers to financing provided to companies by non-bank institutions, such as asset managers, pension funds and private equity firms. These loans offer borrowers access to capital with more flexible terms. Growth in private credit accelerated after the Financial Crisis, as stricter banking regulations created opportunities for private credit firms to fill the funding gap by providing riskier, less liquid loans to companies. Investors have been drawn to potentially higher returns and over the past decade, the market has expanded to $1.7 trillion. Recently, the sector has faced scrutiny, following the bankruptcies of First Brands and Tricolor, shining a light on lending standards and limited transparency. Lending to non-bank institutions now represents about one-tenth of all banks loans, with several major banks exposed to the recent bankruptcies. This has raised concerns that the sector could pose a threat to broader financial stability, given the interconnectedness with traditional institutions like banks and insurers. However, banks and regulators have started to acknowledge these risks and it is an area that is coming under more scrutiny. Is it all taxes and bad news in November’s budget? Chancellor Rachel Reeves’ Autumn Budget, due on 26th November, is set against one of the most constrained fiscal backdrops in years. With weak growth, higher borrowing costs, and strict fiscal rules, Reeves faces a delicate balancing act between honouring Labour’s manifesto tax pledges and funding rising demands for defence, public services, and net zero investment. The multi-billion-pound “black hole” in the public finances is forcing the Chancellor to look for revenue through stealth rather than headline tax hikes. While the government has pledged not to raise the main taxes on working people, wealth and capital have been highlighted as possible targets. Changes to Capital Gains and Inheritance Tax are widely anticipated, alongside potential reforms to Stamp Duty and other property levies. Investors may also see tighter limits or new conditions on ISAs and possible adjustments to pension reliefs for higher earners. In reality, the Budget is shaping up to be less a display of bold reform and more an attempt at political sleight of hand - a package designed to raise billions quietly through frozen thresholds, eroded reliefs, and rebranded taxes. |
