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If you’ve not checked the value of your pension and other investments for a while, you may be in for a very pleasant surprise. Investors’ insatiable appetite for artificial intelligence-related companies is sending global stock markets rocketing – and all of us are profiting.
The record stock market listing of SpaceX on Friday was just the latest sign of investors’ enthusiastic belief in the potential of AI.
The space exploration and AI firm blasted its way into public markets with a near $1.8trillion valuation – the highest in history.
Open AI – the start-up behind ChatGPT – and rival Anthropic look set to list too in the next few months, keen to take their share of the cash investors are throwing at AI giants. Both could be valued at a stonking $1trillion.
Whether you buy into the AI growth story or not, your portfolio will be profiting from it.
You may not hold SpaceX, Open AI and Anthropic yet, but they are likely to make their way into your pension and Isa investments in the coming months and years through the funds that you hold.
AI and tech firms already dominate global stock markets – and therefore most of our investment portfolios. The biggest, Nvidia, which makes chips used for AI, is up 41 per cent in a year and worth just shy of $5trillion. Nvidia, alongside Apple, Microsoft, Amazon, Google owner Alphabet, Facebook owner Meta and Tesla, make up more than a quarter of the value of global stock markets alone.
They’ve made another estimated $6trillion for investors in the last year alone. To put that into perspective, they added almost double the value of the FTSE 100 to their balance sheets in 12 months. If you hold a global fund, a US fund or a technology fund, these companies will be making you richer.
SpaceX, owned by Elon Musk, achieved a record stock market listing on Friday with a near $1.8trillion valuation
OpenAI, run by co-founder and CEO Sam Altman, looks set to list in the next few months and could be valued at $1trillion
So we can all put up our feet and start to plan our luxurious retirements? Not so fast.
The growth rate we’re enjoying is very unusual. Only the most optimistic investors believe it will go on indefinitely. Experts warn there are some very real dangers on the horizon that could stop it in its tracks – and many fear it will shriek into reverse.
So, do we buckle up and enjoy the ride while it lasts? Or do we need to act to change course in case the growth runs out of track?
Here economists, fund managers, investment and behavioural experts weigh in on what could be down the line – and what we should do now to protect our savings.
Investment growth
My pension is up 25 per cent year-on-year. That’s a fantastic rate of return. Even 10 per cent would be considered high by most financial experts. Some days my pension earns more than I do.
There’s a good chance your pension will have enjoyed something similar. That’s because if you save into a workplace pension, it’s likely that your money – like mine – is automatically going into a fund that invests in the shares of companies all around the world.
Such funds tend to be the default in pension schemes, unless you are approaching retirement or hand-pick your investments. The value of these funds has been going like a runaway train.
If you invest through a stocks and shares Isa or general investment account and have money in low-cost tracker funds that follow a global or US index, you’ll have enjoyed an excellent run too.
Markets took a tumble last week – volatility is high at the moment. But even so, the MSCI World Index, which tracks the value of the largest companies across developed countries, is up 27 per cent year-on-year.
The S&P 500, which tracks the 500 largest companies in the US, is up 20 per cent. Even the UK’s FTSE 100 is up 16 per cent. The growth is overwhelmingly coming from technology stocks – not just in the US but around the world.
Tony Whincup, head of investment specialists at TrinityBridge, says: ‘The technology sector made up around 29 per cent of the global equity market at the start of the year but has delivered 60 per cent of the growth.
‘The share is higher still for the S&P 500, Korea and Taiwan. In Europe, fully half of the equity market’s performance has been derived from tech – even though it amounts to just 7 per cent of the market.’
What could go wrong?
At the moment, global markets are so enamoured with the potential of AI that nothing seems to break their stride.
Not tensions in the Middle East, which has led to a dangerous concoction of constrained global trade, an elevated oil price and heightened risk of higher inflation. Not US President Donald Trump’s tariff threats. Not even surging global government debt in excess of $100 trillion and counting.
But those risks have not gone away and there is no guarantee they won’t dent markets in future.
Nina Stanojevic, senior investment specialist at St James’s Place, warns gravity-defying growth may be making us complacent.
‘Investors have become accustomed to markets shrugging off bad news,’ she says. ‘From geo-political tensions to inflation surprises, markets have repeatedly demonstrated a remarkable degree of resilience. However, this resilience should not be mistaken for the absence of risk.
‘One of the biggest risks facing investors may be that markets are so resilient to bad news that investors underestimate how quickly sentiment can change if growth or earnings start to disappoint.’
Fahad Kamal, chief investment officer at Coutts, agrees that these risks have not gone away. ‘As markets move higher, the key is to keep an eye on familiar risks, interest rates, inflation and geopolitics, which could still shape sentiment,’ he warns. ‘A pick-up in tech stock market listings is a positive sign of confidence, but may also lead to some reassessment of valuations in parts of the market.’
Perhaps as great a risk is that the AI boom disappoints or doesn’t play out as markets predict. Investors have become so reliant on AI and technology stocks to drive growth that even a stumble would ripple across markets. There are plenty of obstacles ahead.
Higher energy costs could squeeze profits as the data centres required for AI need huge amounts of energy. Inflation could push up interest rates, making it more expensive for AI firms to borrow, diminishing the value of future earnings. AI could decimate other sectors and workforces, reshaping economies.
The future of AI is so uncharted that it’s impossible to see what the future holds.
Jason Holland at online investment platform Bestinvest points out that although there are understandable reasons for investor enthusiasm, periods of exuberance can also increase risks. No trend goes on indefinitely.
‘This level of concentration has been rewarded so far but history reminds us that market leadership by a theme or sector has not lasted for ever,’ he says.
The AI boom has created such seismic shifts that volatility is inevitable whatever the long-term future. Other sectors could see values drop as investors cut their holdings to free-up cash to place in the latest IPOs.
What’s your goal?
For investors trying to protect savings and build long-term wealth, AI-dominated markets are a minefield.
Even a year ago experts were warning that the AI exuberance was entering bubble territory.
But if you’d heeded those warnings and cut your exposure to AI and tech stocks, you would potentially have missed out on double-digit growth. It’s only with hindsight you find out for sure whether there was a bubble – and even if you are confident there is one, it is impossible to know when it will pop.
For all the naysayers, there are as many experts who believe the winning streak will continue.
Stephen Yiu, manager of Blue Whale Growth Fund, says: ‘We do not think this is a bubble that is going to disappear overnight.
‘The changes to how we operate on a daily basis will be very profound, and this is going to happen a lot quicker than anything seen before.’ Alexander Joshi, head of behavioural finance at Barclays Private Bank and Wealth Management, suggests investors shouldn’t try to predict the future of markets, but should choose a very different starting point.
‘The key word is “goal”,’ he says. ‘Start by thinking about what you’re seeking to achieve. Is your goal to buy your first home, for example, or to retire early?
‘Once you know, you can work back from that. It simplifies investing massively and stops you going down rabbit holes like the future of space exploration.’ For example, if you hope to take money from your investments soon, you may not want to invest in volatile assets and risk a fall just before you cash out.
Fahad Kamal, chief investment officer at Coutts, says this pick-up in tech stock market listings such as SpaceX is a 'positive sign of confidence'
Maike Currie, head of personal finance at retirement firm PensionBee, says that people underestimate the tax relief they get on pensions
He adds that this approach can help investors deal with the fear of missing out (FOMO).
‘With IPOs and crypto and other trends, dealing with FOMO is easier said than done,’ he says. ‘But if you stay true to what you’re trying to achieve, that should keep you on track. Just remember that everyone else in the market has different time horizons and goals – they’re not one homogeneous group – and they’ll be different to your own.’
Maike Currie, head of personal finance at retirement firm PensionBee, advises making a distinction between your pension and other investments.
‘I think you have got to take a view that these AI giants and mega IPOs are frothy investments,’ she says.
Currie suggests that those wanting more exposure to them could use their ‘play pot’ for that – a smaller fund that you can afford to take risks with.
‘Your pension, though, should be well diversified,’ she adds.
If you’re worried...
The key to keeping risk in check is diversification. If you spread your investments across a range of sectors, geographies and asset classes, you are less exposed if one falls.
However, the issue at the moment is that tech and AI stocks are so dominant that even a portfolio that looks well diversified on the surface may be highly exposed to them.
If you’re concerned that your exposure to tech stocks does not align with your long-term goals, there are some options.
In traditional index funds, the bigger the company, the greater proportion of the fund it comprises.
Holland suggests complementing holdings in these with so-called equal weighted funds, where you hold an equal proportion of each constituent company.
‘Equal-weighted alternatives spread exposure more evenly across constituent companies,’ he says.
Equally weighted S&P index funds, for example, are available from HSBC, Invesco, iShares and Legal & General.
Paul Derrien, investment director at Canaccord Wealth, suggests another option.
‘You can get passive funds that exclude the seven largest companies in the index. They’ll still be weighted, but just take the top seven out,’ he says. ‘So if you’ve got a portfolio in a global tracker, one option would be to divide it so you have some in the big companies as they may have further to run, but not as much.’
Another option is to complement passive holdings with active ones that hold a greater variety of companies or asset types.
Don’t fear the fall
Even if there is a market correction or worse, if you’re saving for the long-term, hopefully you should have time to recoup losses.
Currie explains: ‘If we do see a dip and you are regularly investing, you’re going to get more for your money – you’ll be buying on the sale rack.
‘The other thing that people underestimate is the tax relief they get on pensions – 20, 40 or 45 per cent. So think about, say, Black Monday, one of the worst falls in the history of the stock market when the Dow Jones Industrial Average fell around 20 per cent. If you’d put money into your pension you would have benefited from tax relief, and that would have cushioned you because when you put money in you’re already up 20 per cent.’
If you’re closer to retirement and plan to take money from your investments sooner, you will have less time to make up any losses so you may take a different approach to risk.
Try not to look!
Whatever happens, it’s likely to be a bumpy road ahead.
‘AI is only around three years old,’ Yiu points out.
‘Think about what the smartphone was like in 2011 when it had just been around for three years. Many of us had a Nokia or BlackBerry and resisted touchscreens. We’re in such early stages and AI is advancing so quickly.’
If you’re confident that your investment strategy aligns with your goals, tinkering and trying to keep up with trends is unlikely to be helpful.
The easiest way to do this, says Alexander Joshi, is to turn down the noise. ‘As we have live news feeds and social media and access to information all the time, we start to get the perception that the world is pretty crazy,’ he says.
‘That raises our nervousness and makes it more likely that we’ll act on emotion rather than a level head. Think carefully about what you’re reading and resist the temptation to check your investments frequently. Remember, you’re investing for the long-term.’
So if your curiosity about the performance of your pension and other investments has been piqued, have a look, make sure you’re still on track for your current goals. Then leave well alone.
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