3 questions you asked our investment expert

Every quarter when we publish our Investment Outlook, its author Tom Stevenson takes the opportunity to answer questions from Fidelity investors. You can watch his Investment Outlook Q&A with Ed Monk, associate director, below. Here are three of the key questions they covered.

Q: Are there solid reasons for the widespread increases in indices and popular stocks around the world during this first quarter of the year? Many economies are still verging on recession. I’m concerned that AI fervour around the Magnificent Seven is causing a bull market that can’t be sustained. Is it all built on sand?

A: Tom said he didn’t believe the stock market rally was built on sand.  

“It’s true that much of last year was driven by a handful of big growth stocks in the US, including the Magnificent Seven,” he said.

He pointed out that the “equal-weighted” version of the S&P 500, which treats the 500 stocks in the blue-chip US index as if they were all the same size rather than giving more weight to the bigger stocks, had really been lagging the top seven or top 10 stocks in the index. Now it’s catching up. Since the market bottomed in October 2022, the equal-weighted version of the S&P 500 is up 36%. It’s not nearly as much as the 50% or so rise we’ve seen in the more familiar market-capitalisation-weighted index, but it’s certainly catching up.

This year, it appears the market rally is finally beginning to broaden out.

Markets around the world are starting to hit new highs. The Japanese market is doing well, as are European shares. Even the UK, which has been out of favour for a long time, is picking up. Recently the FTSE 100 hit 8,000. The last time that happened was in February 2023.

As the questioner mentions, some investors may be wary of the current bull market. Some even expect a repeat of the dotcom bubble. Tom disagrees.

“It doesn’t feel anything like the dotcom bubble, where there were a lot of companies on ridiculously high valuations, with no fundamental underpinning,” he said. “It was an illusion in many cases. What we’re seeing this time around is strong earnings growth from some companies. And more broadly we’re seeing earnings are being delivered, with earnings growth forecast to accelerate through this year.”

In terms of the fervour around the Magnificent Seven, Ed said he didn’t view it as a bubble.

“AI will be transformative in some ways, but we don’t know exactly how,” he said. “The point is it may not turn into what the market thinks it will and may be a disappointment overall. But that’s going to take a long time to work out. You’re not going to suddenly overnight find out that AI doesn’t work as an industry.”

Q: Do you expect investment trusts to recover the discounts they fell to in 2022 and 2023?

A: Tom said it was an interesting question because we have seen a big widening in discounts.  

First, a quick explainer. Investment trusts hold a portfolio of assets, but they are also shares in their own right. The share price of an investment trust is determined by supply and demand, so it may or may not be the same as the value of the underlying assets. That means an investment trust can trade at a premium or at a discount to asset value.

In the past couple of years, Tom said, the discount on many investment trusts has widened.

“Before we came into the studio to have this conversation, I was talking to someone about Fidelity’s investment trusts. He said the discounts are quite wide by historic measures. One of the investment trusts that we were talking about stands at a 10% discount to the value of its assets,” Tom said. “This discount is quite attractive − it’s actually one of the reasons why people invest in investment trusts. It gives you the opportunity to buy assets cheaply. In a rising market, you might expect that discount to narrow.”

If on the other hand the discount on an investment trust gets too wide, its board may take action. It may for instance buy back the trust’s own shares in an attempt to narrow the discount. A very high-profile trust recently did this.

“That’s another reason to be interested when discounts are relatively wide, because you know that there are people whose job it is to think about how to narrow that discount,” said Tom.

Q: How safe is it to invest in the UK ISA?

A: In the Budget in March, plans for a UK ISA were confirmed. It will offer a new £5,000-a-year allowance in addition to the existing £20,000 and the aim is to increase investment in UK-listed companies.

The new ISA is expected to become available in 2025 but details about how exactly the government will define what counts as a UK company have yet to be fleshed out.

Tom said it would be totally safe as a vehicle but what might concern investors was that their portfolio could end up overweight towards the UK.

“I think that’s where the question of safety comes in but, depending on how you manage it, I think you can get around that. And then it becomes a question of whether you think the UK is an attractive place to invest,” said Tom.

This was covered in another question from a Fidelity client, which Tom and Ed answer in the video below. In summary, they said London-listed shares looked cheap on some measures relative to other markets and they expected that discount to narrow sooner or later. 

However, Ed warned that investors might have to think hard about their exposure to the UK. He said ensuring that the assets you held in your UK ISA met the rules the government will set for what counts as a “British asset” could be complicated. 

Tom agreed and said complexity was the enemy of good investment outcomes.

“I think that’s where we’re missing the trick here, in the simplification of the savings, ISA and pensions regime. The simpler we can make it, the more likely people are to take advantage of it,” he said.

You can watch the full Q&A below.

Important information: investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Please be aware that past performance is not a reliable guide indicator of future returns. Shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.