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History doesn’t repeat itself, but it often rhymes
As I sit here contemplating how to intertwine UK politics, the maverick President of the US, a tortoise of an economy and a hare of a stockmarket, I am distracted by Matt Fitzpatrick hitting the perfect bunker shot into 18 at Bethpage to put another nail in the US Ryder Cup coffin – the ball spinning back to the flag with the sort of action that Murali would be proud of.
What a performance from Luke Donald and his team - it is like Rome all over again; history doesn’t repeat itself, but it often rhymes.
Now onto more pressing matters…
UK politics & the economy
In August 2024, shortly after leading his Labour Party to a landslide General Election victory, Sir Keir Starmer is quoted as saying ‘I am absolutely determined to restore honesty and integrity to Government’.
In the intervening period we have witnessed a number of Minister resignations for, shall we say, unscrupulous behaviour whilst even Starmer himself is now making headlines regarding a donkey paddock and his Cabinet has had more shuffles than a deck of cards.
The economic outlook is challenging, as inflation remains stubbornly high at 3.8%, we have anaemic GDP growth, the labour market is weakening and pay growth is cooling. The Bank of England therefore faces a difficult paradox; retain interest rates at current levels to stifle inflation or cut interest rates to a less restrictive level in order to stimulate growth (and reduce government borrowing costs). Market consensus, for what it’s worth, is currently for two rate cuts in the first half of 2026, bringing the base rate down to 3.5%.
On Wednesday 26 November 2025 Rachel Reeves will announce her Autumn Budget, and we are filled with trepidation as to how the expanding deficit will be funded; Labour back benchers will rebel against any proposals for the welfare reform which is necessary to cut government spending (and is now at a post World War II high) so higher taxes are coming.
As is sadly becoming an annual event, I list below possible changes in the Budget:
• Investment Tax: Labour has refused to rule out scrapping the dividend allowance and raising dividend tax
• Pensions Tax: Potential cuts to the 25% tax free lump sum and reducing pensions tax relief
• Inheritance Tax: Labour could extend the 7 year rule to 10 years, remove it completely or cap how much parents can give to children
• Council Tax: The rates could be re-evaluated with a focus on ‘higher value homes in London and the South-East’
• Capital Gain Tax: The headline rate could be increased further (perhaps to 35%) whilst Labour could remove the protection that exempts you from paying CGT when selling your family home
• Income Tax: A further extension to the income tax threshold freeze appears likely
• Wealth Tax: Potentially taxing significant wealth, but how this could be implemented and the tax actually recovered is anyone’s guess.
Adopt the brace position.
Despite the ‘pro-growth, pro-business’ narrative attached to Labour party marketing strategies, it is clear that last year’s Budget was anything but that, with the impact of the April National Insurance and Minimum Wage increases starting to emerge in economic data.
Such a backdrop is not conducive to inward international investment, as evidenced by Merck & Co, the large US pharmaceutical company, which in September announced it has abandoned a £1bn drug research centre in London as ‘simply put, the UK is not internationally competitive’. Similarly in a fresh blow to the UK pharmaceutical industry AstraZeneca has paused plans to invest £200m at a Cambridge research site, which follows the company scrapping a £450m plan for a vaccine manufacturing plant in Liverpool earlier this year. Sir Jim Ratcliffe, owner of Ineos (one of the world’s largest chemical producers) and Manchester United, has taken a similar stance, announcing that £3bn of Ineos spending will be pulled from the UK and diverted to the US because of high costs (such as energy and wages) and the lack of certainty over what future tax rates will be.
The economic outlook is challenging, as inflation remains stubbornly high at 3.8%, we have anaemic GDP growth, the labour market is weakening and pay growth is cooling.
TACO
In September the US Federal Reserve delivered its first rate cut of the year in response to a deterioration in macroeconomic data, job gains slowing and the unemployment rate edging up.
In the press conference Fed Chair Jerome Powell once again suggested the impact of tariffs on inflation would be one-off, rather than persistent. The data around this is mixed currently, not least since many companies engaged in inventory management in anticipation of the tariffs (i.e. shipped extra stock before the tariffs were announced or in some cases have shipped stock via a 3rd country which benefits from lower tariffs) which are still being unwound. Moreover, the actual tariff rates implemented between the US and many countries are not as severe as initially proposed, if at all –Trump Always Chickens Out (TACO).
Whether he will chicken out on other policy measures remains to be seen, but President Trump is vocal in his desire to have lower rates in the US, whilst also interfering with the Fed’s independence with insults to Jerome Powell and more latterly Fed Governor Lisa Cook. On multiple occasions President Trump has threatened to fire Powell, only to back down later – TACO.
It is no coincidence that Christopher Waller, a front runner to be the next Fed Chair, voted for a 0.5% cut in September. Much like the UK, with a huge and rising budget deficit the US faces significant challenges, whilst Trump’s erratic policymaking hardly helps.
The actual tariff rates implemented between the US and many countries are not as severe as initially proposed
Federal
Funds Rate
The AI boom
With restrictive policies on immigration, the US faces a future with a stagnant or even shrinking labour force, meaning productivity improvements shall have to do the heavy lifting if the economy is to expand.
The macroeconomic data points to the US pinning its hopes on the artificial intelligence (AI) boom to support the economy. Indeed, the precipitous rise in the US stock market has been fuelled by expectations of rising earnings, the US tax and spending bill and trade deal pledges to invest in the US, but the major stimulus has come from AI spending.
So far so good for Trump, as the newly coined ‘Fab 5’ (Amazon, Alphabet, Meta, Microsoft and Nvidia) are clearly great companies but have grown to dominate the US (and therefore global) equity indices. To put this into perspective the top 10 stocks in the S&P500 account for almost 40% of the entire market (and around a third of earnings) and have been the primary driver of the index’s year-to-date returns.
Just to add further perspective, the market capitalisation (total value of the company) of Nvidia is $4.3 trillion. Yes, trillion! The aggregate value of the entire FTSE100 is approximately £2.2 trillion. At current values one US listed technology company is valued at almost 1.5x the total of the biggest 100 companies in the UK.
The five most dangerous words in investment are ‘it is different this time’. The inexorable rise in AI related US technology stock is predicated on the fact that they are growing faster for longer with minimal incremental capital required to support that growth. So maybe it really is different this time and PE ratios of 40x (Nvidia) and 25x (S&P 500) are acceptable. BUT, the numbers involved in this AI phenomenon really are extraordinary.
In the last month Oracle (the US listed cloud data business) announced it is to buy $40bn of GPUs (graphic processing units, essentially the brains) from Nvidia. Concurrently, Nvidia is to invest $100bn in OpenAI whilst OpenAI is to buy $300bn of capacity from Oracle (financed by Oracle). A similar deal was announced by Oracle in May, purchasing approximately 400,000 Nvidia GPUs for a large scale AI data centre in Texas, and Oracle then leased the computing power to OpenAI. The numbers are staggering and the investment acts as a huge fiscal bazooka for the global economy. But the circular nature of the finances (in the old days known as ‘pig and pork’) and vendor-financed transactions, in addition to the unknown future capacity requirements leads me to have at least a modicum of sceptism as to what the return on this invested capital will actually end up being. There is a lot of jam tomorrow being spread on the proverbial AI scone!
At current values one US listed technology company is valued at almost 1.5x the total of the biggest 100 companies in the UK
Nothing stays the same forever
We retain significant, albeit underweight relative to global indices, exposure to US technology via holdings in stocks such as Microsoft and Alphabet. We have also sought to invest in companies whose fortunes are essentially a by-product of this capital investment.
For example Vertiv, a US listed leader in cooling equipment for data centres (AI data centres require significantly more advanced and efficient cooling solutions than traditional data centres) and Schneider Electric, which is also benefiting from other companies’ AI investment as the need for energyefficient, high-density data centers accelerates and drives demand for Schneider’s infrastructure and expertise. Similarly ASML (known as the most important technology company you’ve never heard of) is a Dutch company which has a monopoly in lithography, essentially providing chipmakers with everything they require to mass produce the most sophisticated microchips.
However, we are also conscious of the requirements for balance, diversification and risk management. As outlined above, with the top 10 stocks in the S&P500 index representing almost 40% of the index, market concentration is at historic highs, and I do not expect this to persist indefinitely, it never has historically.
I am currently reading ‘Richer, Wiser, Happier’ by William Green (hat tip WPW), a book that explores the investment principle and habits of more than 40 of the most successful investors in history (Buffett, Templeton etc). In the chapter dedicated to Howard Marks of Oaktree Capital he quotes John Kenneth Galbraith who said ‘We have two classes of forecasters: Those who don’t know; and those who don’t know they don’t know’.
In our profession one must have a reasoned view as to the possible future outcomes, but the investment world is filled with people who believe they know what the future holds, who believe they can accurately predict economic data, interest rate policy and stock market movements. I suppose even blind squirrels sometimes find an acorn!
But in reality no-one really knows what the future holds; as an example an 11 year equity bull market ended in March 2020 not due to geo-political events, or interest rate policy, or because of a business stifling UK Budget, but because a hitherto unknown virus called Covid-19 emerged.
‘But if the market is precarious, you don’t have to know what the catalyst will be, you only have to know that there’s a vulnerability’ – Howard Marks.
This is a stark reminder that cycles change, and nothing stays the same forever. So despite the AI induced market euphoria we are currently witnessing, it is important to stick to your investment principles and ensure portfolios are positioned for a range of outcomes, not just a binary bet on one sector.
For over a decade leading up to 1997 Jean-Marie Eveillard, a fund manager at Societe Generale, generated an enviable record of consistently beating the market but then lagged the market significantly as tech stocks went nuts in the dot.com frenzy. His prudence and lack of ANY exposure to technology was, at the time, verging on career suicide. Then the bubble burst and this ‘relic who didn’t understand the wondrous innovations of the new economy’ saw his balanced, diversified portfolio of stocks perform admirably; he then received a Lifetime Achievement Award in recognition of his longevity of performance and courage to differ from consensus! In life and in business, it is the courageous decisions we make which typically produce the most reward over time.
Despite the AI induced market euphoria we are currently witnessing, it is important to stick to your investment principles and ensure portfolios are positioned for a range of outcomes.
So alongside our AI exposed technology and data stocks, we remain comfortable with holdings in more durable, steady investments such as:
Colgate-Palmolive
Which has been selling toothbrushes and toothpaste around the world since the 1870s and controls over 40% of the global market. Recent share price performance has been lacklustre, but the company has a dominant position selling an inexpensive and habitual product which is resistant to change, evidenced by 62 years of consecutive dividend growth.
L’Oreal
As the world’s largest cosmetics company, L’Oréal benefits from a highly diversified portfolio spanning skincare, makeup, haircare, and luxury products, enabling it to reach both mass retail and premium markets. Recent performance has been weighed down by pockets of consumer weakness in the US and China, however, with a portfolio of more than 35 “power brands”, including L’Oréal Paris, Maybelline and Garnier, the company consistently outperforms the broader health and personal care sector and demonstrates resilience across economic cycles.
Conclusion
We pick strong swimmers, and allow the tide to come and go.
The current market and concentration of returns is challenging for a sensible, diversified investor. Moreover, no investment strategy works in all market environments, so periods of more lacklustre returns are to be expected. Indeed, Berkshire Hathaway has underperformed the S&P500 by almost 23% in the last 5 months. But we believe our portfolios are sensibly positioned for a range of outcomes, and remember: History doesn’t repeat itself, but it often rhymes.
Will Mellor Investment Director October 2025
October 2025 equity suggestions
* Equivalent Gross Redemption Yield for Index Linked Gilts assuming RPI inflation averages 3% or 5% to redemption. ** Price adjusted for inflation (please note the published price may be different as it does not include accrued inflation)
FTSE 100 – 1 year
FTSE 100 – 5 year
Source: Iress Barratt & Cooke
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