It’s an unnerving time for those whose long-term wealth – held in a hotch-potch of pension funds and Individual Savings Accounts – is linked to the fortunes of equity markets.
In recent days, the US stock market – a key source of investment return for investors like me and you – has been seriously rattled by the antics of gunslinger Donald Trump and his America-first approach: tariffs uber alles.
Shares in the country’s best-known stocks, ‘the magnificent seven’, have taken a right battering as a result of fears that the US economy could be heading towards stormy waters.
None more so than electric car manufacturer Tesla – headed by Elon Musk, senior adviser to Mr Trump – which has seen its shares slide by nearly 18pc over the past five days.
It means the company’s shares are now less than half the value they were just before last Christmas – and down 45 per cent since the turn of the year.
‘Tesla has been a car crash of an investment this year,’ says Dan Coatsworth, analyst at investing platform AJ Bell, rather pointedly.
Disruptor: The US stock market has been seriously rattled by the antics of gunslinger President Donald Trump and his tariffs
He’s absolutely right although, to put this crash into context, Tesla’s shares are up nearly 25 per cent over the past year.
While the respective falls recorded by other magnificent seven stocks have not been as sharp – ranging from 0.2 per cent (Meta) through to 22 per cent (Nvidia) – AJ Bell says that an astonishing £1.2trillion has been wiped off their collective market value since the start of the year. A mind-blowing number.
Investors are becoming increasingly edgy that further share-price corrections are in the offing.
Falling US equity prices have also caused other global markets, including the UK stock market, to wobble in response to the situation.
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‘This big sell-off feels ugly,’ warns Drew Pettit, an equity strategist at American investment bank Citigroup.
Happening almost 25 years to the day after the devastating 2000 dot-com market crash, it has raised concerns among some experts and private investors that history may potentially be about to repeat itself.
However, it must be stressed that this view for the time being remains very much a minority one and is no more than a whisper.
As I report later on, most commentators are confident that the current stock market storm in the US will peter out – and that the case for investing in equities (for the long term) will once again re-establish itself.
Among them is Susannah Streeter, head of money and markets at investing platform Hargreaves Lansdown.
She says that investors ‘should keep their eye on the long-term horizon – and certainly not panic and withdraw money rapidly. Big bumps in the road are part of the investment journey.’
Crucially, Ms Streeter says that investors should use the wake-up call prompted by the market volatility witnessed during the last few days to ‘prompt a re-evaluation of their portfolios to ensure they are well diversified’.
The barnstorming performance of the US equity market in recent years has resulted in many British investors having portfolios that are heavily skewed towards the United States market – and to the country’s magnificent seven stocks in particular.
She adds: ‘Time in the market and diversification have consistently been the foundations of successful investment strategies.’
Bang on the nail.
Why there are market jitters
The reason for the retreat in US and (to a lesser extent) global equity prices lies firmly at Mr Trump’s door.
His determination to make the United States great again by imposing a raft of tariffs on major trading partners – the likes of Canada, China and Mexico – has not gone down well with many investment and economic experts.
A policy decision not helped by the President continually tinkering (flip-flopping) with the terms of the tariffs – one moment imposing them, the next reversing, changing or delaying them.
US-based: Most global investment funds and stock market-listed investment trusts have a big chunk of their assets in the US market – although their name might not suggest so
Rather than making the US less dependent on imports and engendering domestic economic growth as a result, most commentators now believe that tariffs could be nothing but bad news for the US.
Instead of stimulating the economy, experts think tariffs will harm the US. Flaccid growth, stubborn inflation and US consumers in retrenchment rather than spending mode are all more likely outcomes.
‘Trumpcession’, rather than Trumpism, is now being openly talked about. And if it happens, some say the world could follow suit and fall into recession.
Stock markets aren’t keen on such bad news.
American banks have not been backward in coming forward in airing their views and opinions.
Goldman Sachs has reduced its US economic growth forecast for this year from 2.4 per cent to 1.7 per cent while stating that the US now has a one-in-five chance of spiralling into recession.
Canadian-owned BCA Research says the US faces a ‘cascade of bad economic news’, while American investment bank JP Morgan believes there is a 40 per cent probability of a global recession as a result of ‘extreme’ US policies.
Not overwhelming indicators that the US economy is going to rack and ruin, but these negative views and projections did not exist when Mr Trump was installed as President of the United States in January.
The President and his entourage have not helped matters. Last weekend Mr Trump acknowledged the country faces ‘a period of transition’ and refused to rule out stumbling into recession.
One of Mr Trump’s senior economic policymakers (Scott Bessent) also said that the economy would have to go through a transition – a ‘detox period’ – before the administration’s policies bring ‘wealth back to America’.
Only Mr Trump’s commerce secretary, Howard Lutnick, put a brave face on matters by stating there would be no recession. He said we would see ‘over the next two years the greatest set of growth coming from America’.
The way forward for investors
Most who have a stocks-and-shares Individual Savings Account (Isa) and/or a defined contribution pension are more than likely to have exposure to the US equity market.
You might not even know you have so much of your wealth riding on the US market – and Mr Trump’s violent mood swings –unless you monitor your portfolios regularly and look under the lid of the funds you hold to see what companies and markets you are invested in.
For example, most global investment funds and stock market-listed investment trusts have a big chunk of their assets in the US market – although their name might not suggest so.
FTSE100-listed Alliance Witan has more than 60 per cent of its £5.4billion of assets invested in US equities.
Magnificent seven stocks Alphabet, Amazon (its biggest holding), Meta and Microsoft are among the trust’s top ten largest investments.
Similarly, global trust F&C (also FTSE100-listed) has six of its ten biggest company stakes in magnificent seven stocks – the exception being Tesla.
None of the investment experts Money Mail spoke to yesterday believe you should be selling holdings in funds with exposure to big US tech stocks – be they US, tech or global equity funds.
Nor should you be piling out altogether of any direct holdings you may have in these individual companies – the businesses are here for the long term and their share prices will in time bounce back.
As Ben Kumar, head of equity strategy at Seven Investment Management, says: ‘Ride out the volatility and prosper long-term’.
But these same experts suggest that it may make good sense to tinker at the edges. This can be done in two ways.
Either by directing new Isa and pension contributions into other stock markets and sectors of the US market outside the magnificent seven. Or by taking a slice of profit from investments that have done well and re-investing the money elsewhere.
Long term gains: None of the investment experts Money Mail spoke to yesterday believe you should be selling holdings in funds with exposure to big US tech stocks
Both strategies will help broaden your investment portfolio – and make it more diversified. Myron Jobson, senior personal finance analyst at investing platform Interactive Investor, says: ‘As ever, diversification is the name of the game.
This means owning a range of different investments to reduce risk.’ Research released by Fidelity International vindicates the importance of diversification.
It looked at how much an investor would have made from investing in each of 15 different investment strategies over the past five, 15 and 20 years.
It then compared these returns with what an investor would have made if they had split their investment equally across all 15 strategies.
The results show that, although investing the entire amount in US equities would have proven most profitable over all three time periods, a diversified approach would have beaten a majority of other strategies.
For example, a £20,000 investment 20 years ago in US equities would have grown to £229,484.
While the diversified strategy would have delivered a much smaller final investment pot of £89,995, it outperformed nine of the individual 15 asset classes.
Tom Stevenson, investment director at Fidelity, says: ‘Will US equities outperform for the next five, 15 and 20 years? No one knows. The cure for the absence of foresight is diversification.’ Absolutely.
Stock markets that currently have diversification appeal include Europe, Japan, the UK (yes, the UK) and emerging markets.
Funds which Interactive likes in these four respective asset classes include Fidelity European, JPMorgan Japanese, Fidelity Special Values and Utilico Emerging Markets. All are part of the platform’s list of 60 top-rated investment funds.
‘These investment themes have all had a decent start to the year,’ says Jason Hollands of wealth manager Evelyn Partners. ‘Investors who have piled heavily into US and US-skewed global funds should perhaps take the opportunity to add more exposure to these other investment regions.’
Hargreaves’s Ms Streeter says another sensible way to diversify a portfolio is by investing in multi-asset funds which are not 100pc equity-focused. Favourites include BNY Multi-Asset Balanced and Schroder Managed Balanced.
Seven’s Mr Kumar says a splendid way to diversify US holdings is to invest in a fund that holds each constituent of the S&P 500, an index charting the stock market fortunes of America’s 500 largest listed companies. Each holding is the same size.
By investing in such a fund, you always get exposure to big US companies beyond the magnificent seven. ‘Equal weighting,’ says Mr Kumar, ‘is more about avoiding pain than looking for gains.’
HSBC, Invesco and Legal & General are among companies that run such funds. All can be bought via an investing platform and their shares are traded on the London stock market.
Other US investment funds worthy of looking at include Neuberger Berman US Multi-Cap Opportunities and Brown Advisory US Smaller Companies – respective favourites of Alex Watts at Interactive Investor and Fidelity’s Mr Stevenson.
As their names imply, both invest beyond the magnificent seven.
One final thought – and it comes from Interactive Investor’s Mr Jobson. ‘Drip-feeding money into investments on a monthly basis helps smooth out the bumps in stock markets.
It means you’re not investing all your money when markets are high or low.’ Sound advice given the uncertain world we live in.
Jeff.prestridge@mailonsunday.co.uk
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